Actuarial Notes

Peer Review

Study guide: Exam 6C

Peer Review is the independent examination of an actuary's work by another qualified actuary. In the Canadian insurance context it most often means review of the Appointed Actuary's valuation and reports — sometimes required by OSFI, sometimes adopted voluntarily by a board seeking assurance that the work is sound.

  • What it provides: independent challenge of methods, assumptions and selections; identification of errors and of omitted considerations; confirmation that the work meets the Standards of Practice; and comfort to the board and the regulator that the valuation has been tested by someone with no stake in the answer.
  • Independence is the essential feature. A reviewer who reports to the same management, or whose firm depends on the relationship, provides less assurance. The reviewer's access to data and staff, and the reporting line for findings, both need to be settled in advance.
  • Scope varies widely: a full re-performance of the valuation; a review of methods and assumptions without re-computation; or a targeted review of specified lines or issues. The scope must be stated in the report, because a limited review provides limited assurance and readers routinely assume more than was done.
  • It does not transfer responsibility. The Statement of Actuarial Opinion remains the Appointed Actuary's. A reviewer's concurrence is not a defence for an opinion that turns out to be unsupportable, and the standards do not permit reliance on a reviewer in place of the actuary's own judgement.
  • OSFI may require it where it has concerns — after adverse development, on a complex or newly acquired book, or where the actuarial function's resources are in question. A required review is a supervisory signal in its own right.
  • The findings must be actioned and documented. The Appointed Actuary's Report should record what the review found and what was done about it; an unaddressed finding sitting in a file is worse than no review, because it evidences that the problem was known.

Designing a Peer Review That Would Work After three consecutive years of adverse development averaging 6\% of opening reserves, an insurer's board commissions a peer review of the Appointed Actuary's valuation.

How should it be scoped, and what should it look for?

Answer Scope it as a full independent re-estimate, not a methods review. A methods review asks whether the approach is reasonable; three years of one-directional development suggests the approach looks reasonable and produces biased answers. Only an independent estimate, built without anchoring on the incumbent's selections, tests that.

What the reviewer should examine:

  1. The actual-versus-expected history. Three consecutive one-sided deviations is not process variance — the probability of three same-direction misses by chance is about 1 in 8, and the size being consistent makes it far less likely still. Something in the process is systematically low.
  2. Where the deviation concentrates. By line, accident year and claim type. Bias concentrated in one long-tail line points at development factors or a tail assumption; bias spread evenly points at a trend or discount assumption.
  3. Whether the process changed — a claims handling change, a case reserve adequacy shift, a mix change, a legal development — and whether the valuation reflected it. Adverse development is very often an unadjusted change in the data-generating process, not a wrong factor.
  4. Whether selections drifted toward management's preference. Comparing the actuary's indicated range with the carried amount across the three years answers this directly, and it is the question the board actually needs answered.

How findings should be handled. Reported to the board's audit or risk committee, not only to management, since one live possibility is pressure from management. The Appointed Actuary should respond in writing, and the Appointed Actuary's Report should record the review, its findings and the resolution.

What the review cannot do. It cannot make the opinion the reviewer's. If the incumbent disagrees with the reviewer and signs the original figure, the opinion remains theirs — and the board then has a documented disagreement to resolve, which is itself a far better position than three more years of quiet deterioration.