Actuarial Notes

Materiality

By Canadian Institute of Actuaries · 2007 · 207099

Study guide: Exam 6C

A CIA task force report to assist Canadian actuaries in considering the aspects of materiality in the professional services they provide. It was developed by the Task Force on Materiality for discretionary use by actuaries and issued in October 2007 (document 207099); it relies to a great extent on the American Academy of Actuaries' 2006 discussion paper Materiality – Concepts on Professionalism, and, as a task force report, it does not constitute Standards of Practice and is not binding.

On the syllabus

  • Exam 6C — objectives C1, C5; candidates are not responsible for the material in the Appendix.

1 Preface

  • The report is a first step in developing Canadian literature on materiality; its concepts apply to valuation, pricing, reserving and financial modelling work in all practice areas.

2 Purpose and Scope

  • It is intended to stimulate thinking and discussion about materiality, not to impose new requirements; the CIA Rules refer to what is material in Rule 13, and Rule 6 (Control of Work Product) bears on how users view the member's work.

3 Background

  • The question of materiality arises in the context of inclusion, of refinement and of disclosure; paragraph 1340.03 of the Standards of Practice gives "material" its ordinary meaning, judged from the point of view of a user, having regard for the purpose of the work.

4 Defining Materiality

  • Per paragraph 1340.03, an omission, understatement or overstatement is material if the actuary expects it materially to affect either the user's decision making or the user's reasonable expectations.
  • Materiality is different from the range of reasonable values in an actuarial estimate and from the inherent uncertainty associated with actuarial estimates.

5 Reflecting Upon Materiality: User is Key

  • User perspective is typically the key element: the actuary focuses on the purpose of the work and its intended users, though indirect users may be unknown to the actuary.
  • ASOP No. 41's framework of intended audience and other users offers an approach; a clear statement of the intended users and uses of the work focuses the preparer on what may be material.

6 Considerations in the Determination of Materiality

  • An actuary would generally select one materiality level for a task rather than separate levels for data and the overall analysis; a "tolerance level" for data is a separate concept.
  • The level relates to the purpose and intended uses of the work, such as statutory surplus or the solvency benchmark ratio for regulatory work, and exclusive reliance on quantitative benchmarks is inappropriate.
  • It also varies with the entity's size, access to capital, stage of life cycle, type of business, net retention and financial strength, becoming more rigorous as the entity approaches a threshold (paragraph 1340.04).

7 Accounting vs. Actuarial Materiality

  • Some actuaries would argue that, for work prepared for financial reporting, the actuary's materiality level would normally be close to the accountant's or auditor's.
  • The CIA/CICA Joint Policy Statement (subsection 1630) expects communication regarding materiality between actuary and auditor; good communication is likely to lead to appropriate levels for both and to facilitate discussion of any differences (actuary and auditor relationship).

8 Communication and Disclosure

  • The actuary would usually at least consider some disclosure of the materiality level selected, weighing the complexity of the concept and the sophistication of the user; subsection 1340 did not then require disclosure of the selected level.

9 Areas for Further Research and Discussion

  • Issues listed include how materiality relates to the range of reasonable results and to the inherent uncertainty of an estimate, and whether it should be treated differently in an internal user report.

Appendix A Helpful References Regarding Materiality

Related readings

  • CIA CSOP — the CIA Standards of Practice, whose subsection 1340 (Materiality), in its 2007 form, the report quotes and builds on

Sources