Educational Note

Study guide: Exam 6C

An Educational Note is guidance published by the Canadian Institute of Actuaries (CIA) describing how the Standards of Practice may be applied in a particular situation. Educational notes are not binding: they illustrate accepted practice rather than defining it, and an actuary may depart from one — but must be prepared to explain why.

Their place in the hierarchy: Rules of Professional Conduct (binding conduct), Standards of Practice (binding practice), educational notes (non-binding guidance), and research and discussion papers (informational only). Confusing a note with a standard, in either direction, is a common error.
Why they matter in practice. The standards are principles-based and deliberately do not prescribe methods. Educational notes fill the gap — on IFRS 17 application, discount rate construction, the risk adjustment, the PAA, reinsurance treatment, FCT, run-off and wind-up valuations, Materiality, and Subsequent Events. In a new area they are frequently the only detailed guidance available.
They are effectively expected. An actuary who ignores a directly applicable educational note without explanation will be challenged by the External Auditor, by OSFI, and in any Peer Review. "Non-binding" describes their legal status, not the practical expectation.
They can conflict or lag. Notes issued at different times may not be fully consistent, and one written before a standard changed may be superseded in part. The actuary must work out which guidance is current, and the standards prevail over any note.
Draft notes circulated for comment carry less weight than final ones, but in a genuinely new area — as during the Transition to IFRS 17 — a draft note may be the best available statement of emerging practice, and using it with disclosure is defensible.

Departing From an Educational Note A CIA educational note on constructing the IFRS 17 discount curve describes a bottom-up approach with an illiquidity premium derived from a specified reference portfolio. An insurer's Appointed Actuary concludes that its liabilities are considerably less liquid than the reference portfolio assumes and uses a higher illiquidity premium, raising the discount rate by $30$ basis points and reducing the LIC by $\$14$ million.

Is this acceptable?

Answer Yes, potentially — the note is not binding — but it is acceptable only if properly supported and disclosed, and the burden is entirely on the actuary.

What must be present:

A reasoned basis. IFRS 17 requires the discount rate to reflect the liquidity characteristics of the insurance contracts. If this insurer's liabilities genuinely have a different liquidity profile from the reference portfolio, a different premium is not merely permitted — it is required by the standard, which outranks the note.

Evidence, not assertion. The claim needs support: the payout profile, the absence of surrender or acceleration options, comparison with observable instruments of similar illiquidity. "Our liabilities feel illiquid" is not a basis.

Disclosure. The Appointed Actuary's Report must state the departure, the reason, and the $\$14$ million effect. The financial statement notes must disclose the methodology so readers can compare with other insurers.

Consistency. The same reasoning must be applied every year, in both directions. Adopting a higher premium in a year when a lower liability is convenient, and reverting later, is a result-driven selection.

The test to apply. $\$14$ million is material on most balance sheets, and it moves the result in the insurer's favour — so it will attract the auditor's and OSFI's attention. The question the actuary should ask before signing is whether the reasoning would have been adopted had it moved $\$14$ million the other way. If not, the departure is not a technical judgement, and the note should have been followed.