Actuarial Notes

Standards of Practice

Study guide: Exam 6C

The Standards of Practice are the rules the Canadian Institute of Actuaries (CIA) sets for how actuarial work in Canada must be done. They comprise General Standards, applying to all practice, and Practice-Specific Standards, including those for insurance contract valuation. Compliance is mandatory for CIA members, and the Insurance Companies Act's requirement to value liabilities in accordance with Accepted Actuarial Practice gives them legal force for federally regulated insurers.

  • The General Standards cover the work an actuary does regardless of practice area: the appropriateness of the work to its use, data sufficiency and reliability, assumptions and methods and the basis for selecting them, Materiality, Subsequent Events, approximations, reliance on others, and communication — including the requirement that a report state its user, its purpose and its limitations.
  • The Practice-Specific Standards for P&C insurance address the valuation of Insurance Contract Liabilities under IFRS 17: the measurement of fulfilment cash flows, the risk adjustment, discount rates, and the Appointed Actuary's reports and opinions.
  • They are principles-based, not a recipe. They tell the actuary what must be considered and disclosed, not which development factor to select — which places the burden of judgement, and of documenting it, on the actuary.
  • The hierarchy of professional obligation: the CIA's Rules of Professional Conduct (integrity, competence, disclosure of conflicts, cooperation with other actuaries) sit above the Standards of Practice; educational notes sit below them as non-binding guidance on how to comply.
  • Deviation is permitted but must be disclosed. An actuary may depart from the standards where circumstances justify it, provided the deviation and its reason are stated. Silent deviation is a discipline matter.
  • Enforcement runs through the CIA's discipline process, and — for an Appointed Actuary — through OSFI, which can find the work inadequate and require it to be redone.

Which Standard Is Engaged? Identify the standard at issue in each situation and what it requires.

  1. Claim data for one line cannot be reconciled to the general ledger, with a \$4 million unexplained difference on \$300 million of liabilities.

  2. A court decision after the valuation date but before the report is signed widens a benefit definition.

  3. The actuary uses a reserve estimate for a small subsidiary prepared by that subsidiary's own actuary.

  4. The actuary selects a tail factor materially different from last year's with no explanation in the report.

Answer

  1. Data. The standard requires the actuary to assess whether the data are sufficient and reliable for the purpose. A \$4 million difference on \$300 million is about 1.3\% — likely immaterial, but the actuary must investigate it, form a conclusion, and disclose it. Ignoring it because it is small is not the same as concluding it is immaterial, and only the second satisfies the standard.
  2. Subsequent Events. The decision provides evidence of conditions that existed at the valuation date, so the liability must be adjusted, not merely disclosed. A subsequent event that creates a new condition after the date would be disclosed instead.
  3. Reliance on others. Permitted, but the actuary must be satisfied the other actuary's work is appropriate for this purpose, and must disclose the reliance in the Appointed Actuary's Report and the opinion. The Appointed Actuary remains responsible for the opinion given.
  4. Communication, and it is a clear failure. A material assumption change must be identified, its effect on the liability quantified, and the reason given. Otherwise a reader cannot separate the effect of experience from the effect of the actuary's own judgement — which is exactly the distinction the report exists to make.