Actuarial Notes

Appointed Actuary

Study guides: Exam 6C, Exam 6U, Exam GI-201

The Appointed Actuary (AA) is the actuary a Canadian insurer's board of directors appoints under the Insurance Companies Act (or its provincial equivalent) to value the company's Insurance Contract Liabilities, report on its financial condition, and give the Statement of Actuarial Opinion. The role is a statutory one with duties owed to the company, to the board, and — in defined circumstances — to OSFI.

  • Appointed by the directors, removable only by them (s. 357), with notice to OSFI on any change and an opportunity for the actuary to state the reasons. That reporting line, above management, is the structural protection that makes the role work.
  • The core duties:
  • Protections: a right of access to the records needed for the work, and civil immunity for statements made in good faith in carrying out these duties (s. 361). Without both, the reporting duties would be unusable.
  • The dual accountability is the defining tension of the role. The AA is usually an employee, paid by the company, working alongside management — and is required to reach conclusions management may not want and to escalate over their heads if necessary. The Standards of Practice and the statute exist precisely to make that possible.
  • The AA is not the auditor. The External Auditor audits the financial statements and relies on the actuary's work for the liabilities; the actuary produces that work. Each has a professional duty to communicate with the other, and neither may substitute the other's judgement for their own.
  • Qualification requires Fellowship of the Canadian Institute of Actuaries (CIA) with relevant experience, and the actuary must comply with the CIA's Rules of Professional Conduct and continuing professional development requirements.

When the Actuary and Management Disagree The Appointed Actuary's central estimate of the LIC is \$318 million, with a reasonable range of \$298 million to \$342 million. Management proposes to carry \$285 million, arguing that the actuary's assumptions are pessimistic and that a lower figure is "still an actuarial estimate." Surplus is \$160 million.

What must the actuary do?

Answer Step 1: the valuation is the actuary's, not management's. Section 365 requires the liabilities to be valued in accordance with accepted actuarial practice, and that valuation produces \$318 million. The actuary does not adopt management's number.

Step 2: consider whether management has a point. Reconsidering assumptions when challenged is professional, not weak. If management has information the actuary lacked — a settlement strategy change, a legal development, a data error — it belongs in the estimate. If the challenge is only that the answer is inconvenient, it does not.

Step 3: the opinion. \$285 million is below the bottom of the range, so the actuary cannot opine that the amount carried makes appropriate provision. The opinion must be qualified or adverse, stating the deficiency of at least \$13 million against the low end and \$33 million against the central estimate.

Step 4: escalate. A \$33 million shortfall against \$160 million of surplus is plainly material. This is a matter with material adverse effects on financial condition: report to the CEO and CFO; if not suitably addressed, to the directors; if still not addressed, to OSFI. Section 361 protects the report made in good faith.

Step 5: the consequences. The MCT ratio is overstated by the deficiency; the FCT report must be prepared on the true liability; and if reserves are light, the rate indications built on them are too, so current business is being underpriced — which under IFRS 17 should be surfacing as onerous groups.

What the actuary may not do: resign quietly. Resignation without reporting leaves the deficiency undisclosed, which is the outcome the statutory framework is built to prevent — and OSFI must be notified of the change in appointment in any event.