Canadian Institute of Actuaries L�Institut canadien des actuaires

Document Sample
Canadian Institute of Actuaries L�Institut canadien des actuaires Powered By Docstoc
					2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007


                                         Canadian             L’Institut
                                          Institute           canadien
                                                 of           des
                                         Actuaries            actuaires
                                                        PD 4
                                         2007 Seminar for the Appointed Actuary
                                          Colloque pour l’actuaire désigné 2007
2007 Seminar for the Appointed Actuary        Appointed Actuary Committee –
 Colloque pour l’actuaire désigné 2007            Current “Hot” Topics
                                         1. Audit Guideline 43            Today’s Key
                                         2. CGAAP Valuation Disclosure Topics
                                         3. Bill C-57
                                         4. IFRS and Impact on Role of Appointed
                                            Actuary
                                         5. Embedded Value Disclosure
                                         6. Source of Earnings Disclosure
                                         7. Practice Certificates and CPD
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007
                                                        Background
                                         •   CICA harmonizing rules
                                         •   AUG 43 changes reliance on experts
                                         •   Same as US GAAP auditing standard
                                         •   Result is that calculation of liabilities
                                             must be audited
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007          Learnings from 2006
                                         • CALM does not fit the US audit model
                                           well
                                         • Audit Approach
                                         • Timing
                                         • Resources
                                         • Overlap with External Review
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007
                                                      Audit Approach
                                         • Risk Based audit approach
                                           – Reserves under CGAAP are far more
                                             sensitive than under US GAAP
                                           – Judgment of the audit specialist will be
                                             applied to testing

                                           – End to end
                                              • Follow one policy from admin to valuation
                                              • Check assets and resulting asset cash flows
                                              • Check operation of reinvestments
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007               Audit Approach
                                         • Be Ready
                                           –   Comprehensive documentation
                                           –   Process charts
                                           –   Internal reviews
                                           –   Agreed timetable and resourcing
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007              Audit Approach
                                         • 3855 interaction
                                           – Reserves at Dec 31 on old basis
                                           – Those for Jan 1, 2007 on new basis
                                         • Software Validity
                                           – Can one assume that 3rd party software is
                                             correct
                                           – Home written software needs to be fully
                                             audited
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007                Audit Approach
                                         • Cost and Resources
                                           – Auditor charges
                                           – Internal actuarial resources


                                         • Benefits
                                           – Forces management to allow actuaries to
                                             do what should have been done — even
                                             without SOX
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007     Overlap with External Review
                                         • Different objectives
                                         • Both cover methods and assumptions
                                         • External review does not check
                                           calculations
                                         • External review usually gives more
                                           detailed assumption assessment?
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007            Moving Forward
                                         • In 2007 the AUG 43 work is starting
                                           earlier
                                         • Move to a more integrated audit
                                           approach coordinating SOX and Aug
                                           43
                                         • Likely increasing focus on auditing
                                           experience studies
                                         • Convergence of audit practices
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007
                                                 CGAAP Valuation Disclosure
                                         Background
                                            Public reporting companies face ever increasing
                                             disclosure pressures for GAAP financial
                                             statements
                                            Policy liabilities are key component of this
                                             pressure
                                             o   dominant role on balance sheet
                                             o   “black box nature”
                                            Increased disclosure pressure coming from
                                             o   CICA disclosure requirements (financial statement notes)
                                             o   securities regulators
                                             o   analysts and other users of company statements (“SIP” or
                                                 supplementary disclosure)
                                            Significant reputational risk to actuarial
                                             profession in this emerging area
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007
                                                 CGAAP Valuation Disclosure
                                         Areas of Increased Disclosure Pressure
                                            Provisions for Adverse Deviation
                                            Sensitivity of policy liabilities to changes in actuarial
                                             assumptions
                                            Impacts of changes in methods and assumptions (“Basis
                                             Changes”)
                                            Movement in policy liabilities
                                            Disclosure of specific components of policy liabilities
                                             o   liabilities for segregated fund guarantees
                                             o   allowance for credit losses
                                         Company practices for level of disclosure and how
                                         disclosure is done, including fundamental definitions (eg.
                                         what is PfAD?) are quite different
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007
                                         Provisions for Adverse Deviations


                                                   Key Question:
                                          What is the Definition of a PfAD?
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007
                                         Provisions for Adverse Deviations
                                         CLIFR Definition: The PfAD is the difference
                                         between the aggregate policy liability that results
                                         from performing the valuation calculation using
                                         best estimate assumptions, and the same calculation
                                         performed with assumptions using margins
                                         Implications:
                                            o   prescriptions on expecteds are part of best estimate
                                                assumptions (eg. annuity mortality improvement)
                                            o   prescriptions on net assumptions with discretion in
                                                components can be either best estimate or mfad (eg.
                                                life insurance mortality improvement)
                                            o   method conservatism is always part of best estimate
                                                (eg. term limitation impacts including segregated
                                                funds)
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007
                                         Provisions for Adverse Deviations
                                            Is this definition most useful to external users?
                                             o   significant disconnect from embedded value where
                                                 method conservatism from term limitation is
                                                 significant source of value
                                             o   to external users, the “term” distinctions can appear
                                                 capricious
                                            As good practice, companies should follow
                                             CLIFR definitions in disclosing PfAD
                                             o   where companies wish to disclose additional
                                                 conservatism, it should be distinguished from PfAds
                                             o   would also be useful to disclose mortality
                                                 improvement impact on PfADs
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007
                                         Provisions for Adverse Deviations
                                         Good PfAD disclosure cannot concentrate
                                         just on the aggregate “amount” or level of
                                         PfAD on a company balance sheet

                                         Users need to understand
                                            o   levels of PfAD relative to mix of businesses and risks
                                            o   changes in levels of PfADs over time
                                            o   stability or level of actual experience relative to best
                                                estimate assumptions
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007
                                         Provisions for Adverse Deviations
                                         There are a number of PfAD Disclosures a
                                         company could make to improve context of PfAD
                                         disclosure
                                             PfAD by Risk Catergory

                                             PfADs by Type of Business

                                             PfADs relative to

                                               o   total liability
                                               o   expected liability
                                               o   value of future policy benefits/expenses (ie.
                                                   exclude PV future premiums)
                                              PfAD Movement Analysis
2007 Seminar for the Appointed Actuary       Sensitivity of Policy Liabilities to
 Colloque pour l’actuaire désigné 2007           Changes in Assumptions
                                            Public reporting companies are required to disclose
                                             sensitivity to changes in key assumptions in the financial
                                             statement notes and/or MD&A
                                            The scope of disclosure is generally consistent and covers
                                              o   insurance assumptions
                                              o   policyholder behaviour assumptions
                                              o   expense assumptions
                                              o   fixed income return assumptions
                                              o   non-fixed income return assumptions
                                            However, the details of how companies perform these
                                             sensitivities is not consistent
                                            Company explanations of how sensitivities performed
                                             also can be vague
                                            Inconsistencies and vagueness are not useful to users, and
                                             ultimately can damage actuarial credibility
2007 Seminar for the Appointed Actuary       Sensitivity of Policy Liabilities to
 Colloque pour l’actuaire désigné 2007          Changes in Assumptions -
                                                       Inconsistencies
                                         Level of Experience Change Assumed
                                            There is significant variation in level of change
                                             assumed in the testing
                                            Companies do not present logic for level of
                                             adverse change assumed – users want to have a
                                             frame of reference
                                            Profession should have guidelines to establish
                                             level of adverse change that should be assumed –
                                             where companies use different assumptions there
                                             should still be a logic consistency
2007 Seminar for the Appointed Actuary       Sensitivity of Policy Liabilities to
 Colloque pour l’actuaire désigné 2007          Changes in Assumptions -
                                                       Inconsistencies
                                         Insurance Risks
                                            Does change impact shown assume same directional change for all
                                             business (eg. insurance and annuities) or vary by block used on what
                                             direction is adverse?
                                            What testing and grouping should be used for morbidity risks (eg.
                                             how are critical illness, LTC, LTD, short term benefits are
                                             incorporated in testing)?
                                            What level of experience should be tested?
                                                          COMPANY                      2006 DISCLOSURE

                                                                           Mortality                     Morbidity

                                                 Manulife Financial    10% adverse change          10% adverse change

                                                 Sun Life Financial    1% adverse change           1% adverse change

                                                 Great-West Life       1% adverse change split     1% adverse change
                                                                       between where increases
                                                                       and decreases are
                                                                       adverse
                                                 Industrial Alliance   5% overall increase                NONE
2007 Seminar for the Appointed Actuary       Sensitivity of Policy Liabilities to
 Colloque pour l’actuaire désigné 2007          Changes in Assumptions -
                                                       Inconsistencies
                                         Policyholder Behaviour Risks
                                            Should testing only cover lapse/surrender risk or all policyholder
                                             behaviour risks (eg. also include items such as premium
                                             persistency)?
                                            Should policyholder behaviour testing combine all policyholder
                                             behaviour risks or look at some risks separately?


                                                          COMPANY         2006 DISCLOSURE ON BEHAVIOUR

                                                 Manulife Financial      10% adverse change in termination rates

                                                 Sun Life Financial      10% adverse change in rates in Year 6+ or 1%
                                                                         absolute reduction in rates for Yr 6+ for lapse
                                                                         subsidized
                                                 Great-West Life         10% adverse change in termination rates

                                                 Industrial Alliance     5% adverse change in termination rates
2007 Seminar for the Appointed Actuary       Sensitivity of Policy Liabilities to
 Colloque pour l’actuaire désigné 2007          Changes in Assumptions -
                                                       Inconsistencies
                                         Expense Assumptions
                                            Level of adverse change tested
                                            How should sensitivity be defined (eg. how should inflation
                                             assumption be treated)?

                                                     COMPANY           2006 DISCLOSURE ON EXPENSES


                                               Manulife Financial                10% increase

                                               Sun Life Financial                10% increase

                                               Great-West Life                   10% increase

                                               Industrial Alliance               5% increase
2007 Seminar for the Appointed Actuary       Sensitivity of Policy Liabilities to
 Colloque pour l’actuaire désigné 2007          Changes in Assumptions -
                                                       Inconsistencies
                                         Fixed Income Assumptions
                                              How should sensitivity be defined?
                                                1) Change only in initial market curve used for reinvestment rates

                                                   but not URR
                                                2) Change in ultimate reinvestment rate

                                                3) Change in both initial curve and URR

                                              Should (1) and (2) be disclosed separately?
                                              Should change in spread assumption over treasuries and/or C1 loss
                                               allowance levels also be stress tested?
                                                     COMPANY                     2006 DISCLOSURE
                                               Manulife Financial     100bp starting curve and 100bp URR separately
                                               Sun Life Financial     100bp immediate increase in rates
                                               Great-West Life        100bp immediate increase in rates
                                               Industrial Alliance    10bp sudden and permanent change
2007 Seminar for the Appointed Actuary       Sensitivity of Policy Liabilities to
 Colloque pour l’actuaire désigné 2007          Changes in Assumptions -
                                                       Inconsistencies
                                         Non-Fixed Income Assumptions
                                              What level of change should be tested?
                                              Should equities be tested separately from other non-fixed interest
                                               (eg. real estate)?
                                              How should non-traditional non-fixed interest be tested (eg. infra-
                                               structure, structured finance, private equities)?
                                              Should testing focus on (1) market correction impact, (2) change
                                               in long term return assumption, or both?

                                                        COMPANY            2006 DISCLOSURE - EQUITIES
                                                     Manulife Financial     100bp reduction in future returns
                                                     Sun Life Financial     10% equity correction (plus 1%bp
                                                                            reduction for segregated funds)
                                                     Great-West Life        10% equity correction
                                                     Industrial Alliance    10% equity correction
2007 Seminar for the Appointed Actuary       Impact of Changes in Valuation
 Colloque pour l’actuaire désigné 2007         Methods and Assumptions
                                         Other Issues

                                            Are impacts pre or post tax?
                                            How are future tax timing impacts incorporated?
                                            Should both favourable and unfavourable movement
                                             impacts be shown? [company practices vary]
                                            Are impacts on all policy liabilities or only shareholder
                                             impacts?
2007 Seminar for the Appointed Actuary       Impact of Changes in Valuation
 Colloque pour l’actuaire désigné 2007         Methods and Assumptions
                                            Current disclosure practices are generally weak
                                            Under current GAAP standards, required minimum
                                             disclosure is simply net consolidated impact of changes
                                             in methods and assumptions, and companies provide
                                             limited details beyond this
                                            OSC recently required one company to develop more
                                             extensive disclosure for MD&A inclusion
                                             o   substantive disclosure of basis change impact by category of
                                                 change with discussion of reasons for changes
                                            Good disclosure practices could include
                                             o   basis change impact by reporting segments
                                             o   disclosure of key underlying components of the changes
                                                   • numbers and rationale for changes
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007
                                                CGAAP Valuation Disclosure
                                         Follow-Up/Next Steps
                                          Appointed Actuary Committee is forming working group

                                           to focus on valuation disclosure
                                            o   working group will consist of representatives from public
                                                reporting companies
                                            o   initial focus will be on disclosure of sensitivity to changes in
                                                assumptions
                                            o   Second focus will be on PfAD disclosure
2007 Seminar for the Appointed Actuary               Brief Update – Bill C-57
 Colloque pour l’actuaire désigné 2007
                                            Appointed Actuary Committee has set up
                                             working groups to develop professional guidance
                                             to support new opinion requirements on par and
                                             adjustable policies under Bill C-57
                                            “Fairness” opinions will be a particular issue
                                            However, work has been suspended until OSFI
                                             supporting guidelines become available and ICA
                                             changes become enacted
                                             o   act changes appeared to be finalized in early 2007 but
                                                 have not yet been gazetted
                                             o   OSFI has not released any draft supplemental
                                                 guidance requirements
2007 Seminar for the Appointed Actuary   Brief Update – IFRS and Impact on
 Colloque pour l’actuaire désigné 2007       Role of Appointed Actuary
                                            IFRS has no direct role for an Appointed Actuary
                                             in determination of policy liabilities

                                            Given dual role as statutory accounts, OSFI may
                                             still want some opinion/role for an Appointed
                                             Actuary to certify liabilities

                                            Regardless of formal requirements under IFRS,
                                             companies will need some co-ordinating function
                                             given it is a principles based regime
2007 Seminar for the Appointed Actuary       Brief Update – Embedded Value
 Colloque pour l’actuaire désigné 2007
                                            Original CIA Guidance Note on embedded value
                                             is still only “exposure draft” after several years
                                            Note should be updated, but not a current priority
                                             o   significant debate would be needed on whether to
                                                 incorporate emerging “market consistent” embedded
                                                 value concepts
                                             o   limited number of companies doing embedded value
                                                 disclosure and no strong push from them to update
                                                 guidance
                                            Lack of consistency and detail in disclosure are
                                             key weaknesses of current Canadian company
                                             embedded value work
2007 Seminar for the Appointed Actuary       Brief Update – Source of Earnings
 Colloque pour l’actuaire désigné 2007                  Disclosure
                                            Working Group under Doug Brooks is underway
                                             to revise SOE disclosure education note

                                            Intent is not to substantially revise the note, but
                                             close gaps that have become apparent
                                             o   unique group business considerations
                                             o   issues addressed in OSFI Guideline D-9
2007 Seminar for the Appointed Actuary   Brief Update – Practice Certificates
 Colloque pour l’actuaire désigné 2007                and CPD
                                            Appointed Actuary Committee is supportive of Practice
                                             Certificate requirement
                                             o   recognize required part of good governance “hygiene” in modern
                                                 environment
                                             o   need to ensure process to obtain certificates, particularly renewal
                                                 is not overly burden some
                                             o   Does “one size fit all” approach make sense
                                            Appointed Actuary Committee is concerned about CPD
                                             implications for actuaries outside Canada performing
                                             “work” to support CGAAP valuation
                                             o   potentially, any actuaries outside Canada who are member of
                                                 mutually recognized organizations who perform any CGAAP
                                                 valuation or DCAT work will be required to meet full Canadian
                                                 CPD
                                             o   practically, not feasible, particularly for multi nationals
2007 Seminar for the Appointed Actuary
 Colloque pour l’actuaire désigné 2007



                     Questions & Answers

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:7
posted:12/9/2011
language:
pages:33