Actuarial Notes

Corporate Governance

Study guides: Exam 6C, Exam CFE-101

Corporate Governance is the system by which an insurer is directed and controlled — the board's composition and responsibilities, the independence and authority of the oversight functions, and the reporting that makes accountability real. OSFI's Corporate Governance Guideline sets the expectations for federally regulated insurers, and it is the framework within which the Appointed Actuary's role operates.

  • The board's responsibilities under the guideline: approve the business strategy and the risk appetite framework; oversee senior management; ensure the oversight functions (risk management, compliance, internal audit, and the actuarial function) are independent, resourced and heard; approve the ORSA and the internal capital target; and review the FCT report.
  • Board composition expectations: a majority of independent directors, a chair independent of management, collective competence appropriate to the business, and a formal effectiveness assessment.
  • The three lines model: the business owns and manages its risks; the oversight functions independently challenge and monitor; internal audit provides independent assurance to the board. Independence of the second and third lines is what makes the model work, and its absence is a standard supervisory finding.
  • The Appointed Actuary is a governance construct. The Insurance Companies Act gives the appointment to the directors, not management, and gives the actuary a reporting line to the board and ultimately to OSFI — see Duty to Report. That structure is meaningless unless the board actually engages with the reports.
  • The failure mode is passivity. A board that receives reports and does not challenge them satisfies the form and not the substance. Supervisors test governance by looking at minutes: were the actuary's findings discussed, was a dissent recorded, did a limit breach produce an action?
  • Culture is supervised too. OSFI examines whether risk-taking incentives, remuneration and tone from the top are consistent with the stated appetite — and a mismatch between what the framework says and what the incentives reward is one of the most reliable predictors of trouble.

A Governance Failure in Slow Motion An insurer's Appointed Actuary reports for three consecutive years that reserves are at the low end of the reasonable range and that the FCT adverse scenarios show the MCT ratio approaching the supervisory target. Each year the board receives the report and the audit committee notes it. No action is taken. In year four the insurer strengthens reserves by \$70 million and the ratio falls below 150\%.

Identify the governance failures.

Answer Several, and the actuarial reporting was not one of them — the actuary did their job three times.

  1. The board received information and did not act on it. "Noted" is not oversight. Three consecutive warnings on the same subject required a decision: strengthen reserves, raise capital, reduce writings, or record a reasoned conclusion that no action was needed. The minutes will show none of these.
  2. The Risk Appetite framework was not enforced. If the framework contained an internal capital target, the FCT projections approaching the supervisory target should have triggered escalation. If it did not contain one, the framework was deficient.
  3. The oversight function was not effective. The actuary reported and was heard, but nothing followed — which means the second line's challenge had no consequence, and the three lines model was formal only.
  4. ORSA failed its purpose. ORSA is supposed to translate identified risks into a capital target management operates to. A three-year-old identified risk that never reached the capital plan means the process ran and produced nothing.

What the actuary should have done in year three, having seen no response to two prior reports: escalate explicitly. The Insurance Companies Act path — CEO and CFO, then the directors, then OSFI — is available for a matter with material adverse effects on financial condition, and a reserve position at the low end of the range with adverse scenarios threatening the supervisory target qualifies. Section 361 protects the actuary who makes that report in good faith.

What OSFI will conclude. The reserve deficiency is the symptom; the finding will be a governance one, and it will attach to the board and the risk committee rather than to the actuarial function.