1. CIA/CICA Joint Policy Statement
    Communications between actuaries involved in the prep of f.s. and auditors
  2. CIA/CICA Joint Policy Statement - purpose
    • Purpose is to discuss:
      1. Communications between actuaries involved in the prep of f.s. and auditors, regarding their respective responsibilities
      2. How those actuaries and auditors would interact in carrying out their respective responsibilities
      3. How their respective responsibilities may be disclosed to readers of f.s.
  3. CIA/CICA Joint Policy Statement - application
    1. Applies when an auditor is engaged to carry out an audit of f.s. incl amounts determined by actuary
    2. Applies when an actuary considers work of an auditor in conducting actuarial valuation to determine amounts to be included in f.s.
    3. Does not apply to communications with auditor’s actuary or an external review actuary
  4. Defn of enquiring and responding professional
    • Enquiring: actuary or auditor who is considering the work of the other
    • Responding: actuary or auditor whose work is being considered by the other
  5. Responsibilities wrt. f.s.
    • Mgt: f.s. is the responsibility of mgt
    • Actuary:
      • In determining amounts in f.s., responsible for assessing sufficiency and reliability of the data used in the valuation
      • Actuary may consider work of an auditor wrt. data integrity and controls
      • Actuary = enquiring; auditor = responding
    • Auditor:
      • Responsibile for expressing an opinion on fairness with which the f.s. present the financial position, op results and CFs in accord with GAAP
      • When the f.s. incl amounts determined by an actuary, auditor considers work of actuary as part of the audit evidence supporting actuarial valuation
      • Auditor = enquiring; actuary = responding
  6. Communication between the two professionals - Seeks from management the right to
    1. Communicate with the other professional
    2. When necessary disclose any relevant info to the other professional
  7. Communication between the two professionals - Enquiring's request
    • Inform responding of the intended consideration of his work in accord with Statement
    • Request confirmation from responding that he has been engaged by s.h., p.h., directors, or mgt to do the work that enquiring intends to consider
    • Request confirmation from responding that he is a professional in good standing
    • Request confirmation from responding that he will carry out work required in accord with applicable professional standards
    • Make responding aware of enquiring's needs, incl a discussion of:
      1. App of concept of materiality to determine that responding will be using a materiality level appropriate in relation to enquiring’s materiality level in accord with professional standards
      2. Subsequent events, to determine that responding understands how they are to be treated and he will consider effect of matters that come to his attention up to date of his report
      3. Timing of the work to be carried out by responding and date of his report
      4. Any other questions relating to responding’s work
  8. Communication between the two professionals - Responding's written response to enquiring
    1. Confirm that he is available to perform the work that enquiring intends to consider
    2. Confirm that he has been engaged by s.h., p.h., directors, or mgt to do the work that enquiring intends to consider
    3. Confirm that he is a professional in good standing
    4. Confirm that he is qualified to perform the work that enquiring intends to consider (incl having the designations)
    5. Confirm that this work will be carried out in accord with applicable professional standards
    6. Confirm awareness of enquiring’s intended consideration of his work
    7. Discuss any problems expected in meeting the needs of enquiring on a timely basis
  9. Responding’s findings (written response to enquiring after completion of the work)
    1. Identify purpose of the work
    2. Identify f.s. or data to which it relates
    3. Identify responding's relationship to the entity the f.s. or data pertain to
    4. Confirm awareness that enquiring intends to consider the work in accord with Statement
    5. Include a copy of the report provided to the party who employed or engaged responding that sets out the findings and opinions of responding, incl a representation that the work was performed in accord with applicable professional standards
  10. Claim liabilities - Defn and components
    Defn: PV at calculation date of CFs for claims (incl expenses and future income taxes) incurred on or before that date plus PfADs. components:
    1. Amount of case estimates
    2. Provision for dev't on reported, incl LAE
    3. Provision for incurred but unreported, incl LAE
    4. PfAD
  11. Claim liabilities - Circumstances that affect selection of assumptions
    • Internal changes in:
      • Insurer’s UW practice
      • Claims handling practice
      • Reinsurance
      • Data processing
    • External changes in:
      • Inflation,
      • Legal, regulatory, and legislative environment
      • Residual mechanisms, like FA
  12. Prem liabilities - Defn and components
    Defn: (after deducting DPAE asset) PV at calculation date of CF for premium dev't and claims, expenses and future income taxes, incl PfADs, to be incurred after that date on IF policies. Components (at PV)
    1. Future claims and LAE
    2. PfAD
    3. Expected reinsurance costs (on a net basis only)
    4. Maintenance costs
    5. All other liab related to prem dev't
    6. Premium deficiency (if any)
  13. Prem deficiencies - Defn
    Amount which, when added to net Unearned Premium reserve and unearned (reinsurance) commissions, makes an appropriate provision for future costs arising from unexpired portion of IF policies at calculation date
  14. Expected investment return rate for calculation of PV of net CFs
    To be earned on assets, incl reinsurance recoverables, that support insurance contract liab. depends on:
    1. Assets owned at calculation date
    2. Allocation of those assets and related II among LOB
    3. Method of valuing assets and reporting II
    4. Yield on assets acquired after calculation date
    5. Capital G/L on assets sold after calculation date
    6. Investment expenses
    7. Losses from asset depreciation
  15. Expected investment return rate for calculation of PV of ceded CFs - Selection
    1. Investment return rate selected for NPV
    2. Risk-free rate
    3. Investment return rate used by the assuming company
  16. Qualifications, experience, and knowledge required for AA
    1. Technical understanding
    2. Awareness that comes with
      • Maturity
      • Communication with other actuaries
      • Discussions at Institute meetings
      • Familiarity with conditions internal and external to the insurer
    3. Communications skills
  17. First-time AA responsibilities
    1. Timely access to another actuary with experience as AA
    2. Understanding and acceptance from directors in writing of AA’s role and req'ts for time, resources, and access to info
  18. AA - Info needed
    • Files of IF policies and o/s claims, incl their reinsurance;
    • Policy provisions and communications with p.h.'s;
    • Past experience / financial data;
    • Communications with auditors and regulators;
    • Pricing / UW / Claims settlement practices
    • ALM / Capital mgt practices
    • ERM policy
  19. Process to id and assure timely receipt of info for AA
    • An understanding of insurer’s decision-making
    • Communication with mgt who can supply info
    • Communication with auditor in accord with CIA/CICA Joint Policy Statement
  20. AA duties on material adverse matters requiring rectification (as revealed by stress testing, e.g. DCAT)
    • monitoring process to ensure material adverse matters are id'd timely
    • once discovered, report to sr mgt (CEO/CFO), with recommendations on corrective action and and deadline
    • Send a copy to board
    • If no suitable action taken by deadline, report to regulator (and inform board has done so)
  21. Changes in circumstances that affect ratemaking - Under insurer's control and not under control
    • Under control:
      • UW practice
      • Distribution system
      • Claims handling practice
      • Reinsurance arrangements
      • Data processing systems
      • Type of business written
      • Premium rates
      • Rating variables
    • Not under control:
      • Legislated coverage or benefits
      • The economic, social, and legal environments
  22. Ratemaking - Considerations for selecting provision for expense costs
    • Incl residual market assessments, statutory assessments, p.h. dividends, and reinsurance costs
    • May not be directly proportional to premium
    • One-time expense costs need to be amortized
  23. Ratemaking - Assets to consider for selecting investment return rate
    • Risk-free assets of appropriate duration;
    • Fixed-income assets of appropriate duration
    • Assets expected to be acquired.
  24. 1620 considerations for selecting assumptions
    • id and select each assumption needed for work
    • In selecting a model or data assumption, consider
      • circumstances affecting work,
      • past experience data,
      • relationship of past to expected future experience,
      • anti-selection
    • for assumptions other than model or data, can assume continuation of status quo, unless none or unless expected to change
  25. 1620 types of model assumptions
    quantitative assumptions on:
    • Contingent events;
    • Investment return and other eco matters (price and wage indices)
    • Numerical parameters of environment (income tax rate)
  26. 1620 Model considerations
    • model depends on
      • purpose of work
      • sensitivity of model run to matters to make assumptions on
    • balance between
      • complexity needed to reasonably rep reality, and
      • simplicity needed for practicality
    • If model doesn't consider a matter and it is not appropriate, compensate by altering an explicit assumption on a matter model does consider
  27. 1620 purpose of data assumptions
    to relieve insufficiency or unreliability in the data.
  28. 1620 types of assumptions other than model and data assumptions
    • legal, eco, demographic, social environment model and data assumptions depend on
    • usually qualitative, dealing with the environment
      • Legislation (Income Tax Act)
      • Student education;
      • medical care system;
      • social security systems
      • International treaties
  29. 1620 Past experience data are:
    • Relating to the case itself and recent past
    • Homogeneous rather than heterogeneous; and
    • Statistically credible.
  30. 1620 Expected future experience vs. past experience - extrapolation takes account of a change that affects outlook:
    • A change in case estimate practices may affect its claims development;
    • Discontinuance of a LOB may affect its expense rates allocable to remaining lines; and
    • A change in judicial practice may affect settlement of claims.
  31. 1620 Anti-selection examples
    One party in a relationship may have the right to exercise certain options, policy owner, a borrower, a lender, or a shareholder.
    • Policy owner to renew term life insurance at its expiry for a stipulated premium;
    • Mortgagor to prepay principal, or an issuer to call a bond or redeem a preferred share; and
    • Shareholder to retract a share
  32. 1620 extent of anti-selection depends on
    • size of the advantage from each exercise of the option
    • policy owner’s difficulty in making the required judgment
    • sophistication of policy owner
  33. 1620 Independently reasonable and appropriate in the aggregate - considerations
    • avoid use of independently reasonable assumptions that are inconsistent or biased in the same direction, both might lead to assumptions not reasonable in agg
    • use of independently reasonable assumptions implies each assumption is explicitly defined. But no requirement to use explicit assumptions, as long as result of using that model does not produce a material error.
  34. 1620 Discount rate
    constant or vary over time. In selecting the BE assumption, may either
    • Take into account expected investment returns of assets that support liabilities; or
    • Reflect interest rates on relevant fixed income reference securities
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