Actuarial Notes

Subsequent Events

Study guide: Exam 6C

Subsequent Events are events occurring after the valuation date but before the report is completed that may bear on the valuation. The Standards of Practice require the Appointed Actuary to consider them, and the treatment turns on a single question: does the event provide evidence about conditions that existed at the valuation date, or does it create a new condition afterwards?

\begin{cases} \text{Evidence of conditions at the valuation date} & \rightarrow \text{adjust} \\[4pt] \text{New condition arising after} & \rightarrow \text{disclose (or neither)} \end{cases}

  • Adjusting events — the event tells the actuary something true at the valuation date that was not then known. A court decision interpreting a benefit definition (the law was always thus), a large claim settling for far more than reserved, a reinsurer's insolvency arising from conditions already present. These change the liability.
  • Non-adjusting events — the event creates a condition that did not exist at the valuation date. A catastrophe occurring in January after a December year end, a new statute effective after the date, an acquisition. These do not change the liability, but may require disclosure if material to the reader's understanding.
  • A third category exists in Canadian practice: events that make the entity no longer a going concern. These change the entire basis of valuation, since a liability valued for run-off or wind-up is measured differently from one valued on a going-concern basis.
  • The cut-off is the report date, not the valuation date. The actuary's obligation to consider events continues until the report is completed, which is why the opinion carries both dates.
  • Judgement is required at the boundary, and it is often contested. A settlement three weeks after year end usually reflects conditions existing at year end; a settlement driven entirely by a January change in the law does not.
  • The consequences are real: an adjusting event of any size moves the Statement of Actuarial Opinion and the MCT ratio, and failing to reflect one is a valuation error rather than a disclosure omission.

Adjust, Disclose, or Neither? An insurer's valuation date is December 31; the report is signed on March 15. Classify each event.

  1. On January 20 an appellate court holds that a category of claims falls outside a benefit cap. \$28 million of open claims are affected.

  2. On February 8 a windstorm causes \$40 million of insured losses.

  3. On February 22 a claim carried at \$2 million settles for \$11 million, on facts fully known at December 31.

  4. On March 1 the insurer's largest reinsurer is placed in liquidation, having been downgraded twice during the prior year. \$60 million is recoverable.

  5. On March 10 the board approves the sale of a subsidiary at a \$15 million gain.

Answer

  1. Adjust. The decision interprets the law as it always was, so the obligation existed at December 31. Increase the LIC by the assessed effect on the \$28 million of claims.
  2. Disclose, do not adjust. The storm occurred in the new year and creates a new obligation belonging to the next accident year. It is disclosed if material to understanding the insurer's position — and \$40 million usually is.
  3. Adjust. The facts existed at the valuation date; the settlement is evidence of what the claim was always worth. Increase by \$9 million, and — more importantly — ask whether the same under-reserving affects similar open claims, which is where the larger number usually is.
  4. Adjust. The reinsurer's condition deteriorated during the prior year, and the liquidation is evidence of a condition existing at the valuation date. The reinsurance asset must be written down for expected non-recovery — and \$60 million is a concentration and capital event that also belongs in FCT.
  5. Neither adjust nor disclose in the actuarial report, though the financial statements may disclose it. It does not affect the valuation of insurance contract liabilities at all.

The discriminating question in every case: was this true on December 31? Items 1, 3 and 4 were; items 2 and 5 were not.