Actuarial Notes

Duty to Report

Study guide: Exam 6C

The Duty to Report is the Appointed Actuary's statutory obligation to escalate any matter that has material adverse effects on the financial condition of the insurer. Under the Insurance Companies Act, the actuary reports first to the CEO and CFO; if the matter is not suitably addressed, to the directors; and if still not addressed, to OSFI.

\text{CEO \& CFO} \;\rightarrow\; \text{Directors} \;\rightarrow\; \text{OSFI}

  • The trigger is a matter with material adverse effects on the financial condition of the company. It is not limited to reserve deficiencies: an improperly accounted reinsurance contract, a projected MCT breach, a data failure that prevents a reliable valuation, or a governance failure preventing the actuary from doing the work all qualify.
  • The escalation is sequential, and each step must be given a real opportunity. The actuary does not go straight to OSFI; management is entitled to address the matter, and the directors after them. What the actuary may not do is stop when an answer is unsatisfactory.
  • Civil immunity makes it usable. Section 361 protects the actuary from liability for statements made in good faith in carrying out these duties. Without it the duty would expose the actuary to suit by the company they are required to report on.
  • Resignation is not a substitute. Resigning without reporting leaves the matter undisclosed — the precise outcome the framework is designed to prevent. Both the company and the actuary must notify OSFI of a change in the appointment, and the actuary may state the reasons, which is what makes a dismissal over a valuation disagreement visible.
  • The successor actuary is part of the design. Under the Standards of Practice an actuary asked to accept an appointment must communicate with the predecessor before accepting, so an insurer cannot escape a finding by replacing the person who made it.
  • Documentation is the actuary's protection. Dates, what was reported, to whom, and what response was received. If the matter is later examined, the file is the record of whether the duty was discharged.

Working the Escalation In November the Appointed Actuary concludes that a reinsurance contract booked as reinsurance does not transfer significant insurance risk and must be accounted for as a deposit. Correcting it would reduce Capital Available by \$45 million and take the MCT ratio from 166\% to 141\% — below the 150\% supervisory target.

The CFO responds that the auditors are comfortable and no change will be made. What does the actuary do?

Answer Step 1 — done. The matter was raised with the CFO. The response is that no change will be made, which is a decision, not a resolution.

Step 2 — the directors. The threshold is plainly met: a 25-point overstatement of the capital ratio, taking a reported position above the supervisory target to one below it, is material adverse effect on financial condition by any standard. The actuary reports to the board — in writing, setting out the risk transfer analysis, the \$45 million effect, and the resulting ratio.

On the "auditors are comfortable" point. It is not an answer. The Risk Transfer assessment is an actuarial judgement the actuary is required to make; deferring it to the auditor is not permitted by the Standards of Practice. It is worth speaking to the auditor directly — they may not have been given the same analysis, and if they have and disagree, that disagreement should be on the record before the statements are signed.

Step 3 — OSFI. If the board declines to act, the actuary reports to OSFI. This is not discretionary once the first two steps have failed.

In parallel, the Statement of Actuarial Opinion. If the financial statements reflect the contract improperly, the actuary cannot give an unqualified opinion — that obligation runs independently of the escalation.

What is protected and what is not. Section 361 protects the reports made in good faith. It does not protect an actuary who says nothing: silence here would be a failure of both the statutory duty and the Rules of Professional Conduct, and the file would show the actuary knew.