Actuarial Notes

Research Paper on the Actuaries' Role in Safeguarding the Solvency of P&C Insurers

By Rachel Dutil and Katerina Kruchinkina · KPMG LLP · 2015

Study guide: Exam 6C

A KPMG research paper for PACICC on the actuaries' role in safeguarding the solvency of property and casualty insurers in Canada. PACICC, having identified inadequate pricing and deficient reserves as the leading causes of P&C insolvency, engaged KPMG to review how insurance legislation defines the actuary, review the IMF's assessment of Canada, contrast provincial superintendents' powers over reserving and solvency monitoring with international sound practices, and review requirements under the IAIS common framework. It lists possible enhancements rather than legal wording. Prepared by Rachel Dutil and Katerina Kruchinkina, it had its final release on March 12, 2015.

On the syllabus

  • Exam 6C — objectives A1, C5; Parts 1, 2, 5 and 7 (pp. 43–47 only).

Part 1 Executive Summary

  • Purpose of Research Paper
  • Organization of the Research Paper
  • Limitation on Scope
    • The scope is limited to the sections of the Insurance Companies Act (ICA) and of provincial insurance legislation that relate to the actuaries' role in safeguarding the solvency of P&C insurers.
  • Research Approach
    • A literature review, questionnaires and interviews with provincial regulators and other stakeholders.
  • Findings
    • Two tables compare, jurisdiction by jurisdiction, whether legislation defines a P&C actuary, requires annual actuarial reports (the Appointed Actuary's Report and the DCAT report), sets a basis of actuarial valuation, requires the actuary to report to the audit committee or board, and gives the actuary access to all relevant information.
    • Possible enhancements are listed by Insurance Core Principle: ICP 1 (the supervisory authority, its objectives and its power to issue enforceable guidelines and penalties), ICP 5 (defining the actuary as an FCIA in good standing meeting CIA and provincial requirements), ICP 8 (the actuary's qualifications, appointment, revocation, responsibilities and reporting), ICP 14 (actuarial valuation requirements, adopting OSFI Guideline E-15, and external peer review) and ICP 16 (adopting OSFI Guidelines E-18, E-19 and A-4 and the Corporate Governance Guideline).

Part 2 Introduction

  • Solvency regulation falls to OSFI for federally incorporated insurers and Canadian branches of foreign insurers, and to the province of incorporation for the rest — 93 Provincial P&C Insurers in 2011; every insurer must also meet the market conduct rules of each province where it is licensed (see Federal-Provincial Jurisdiction).
  • The Canadian Council of Insurance Regulators coordinates the provincial supervisors, with OSFI as an associate member; harmonization of insurance laws remains a key issue for the industry.
  • PACICC is the national guarantee fund, and membership is a condition of licensing; its research shows inadequate pricing and deficient policy liabilities are the leading causes of insolvency, and actuaries play a key role in both.
  • Because 90 percent of the PACICC members that failed since 1988 were provincially supervised, PACICC engaged KPMG to benchmark the provincial legislation on actuaries against international sound practices set by the IAIS.
  • The Actuarial Standards Board issues the Standards of Practice that apply to all CIA members doing actuarial work in Canada, and the CIA enforces them through discipline.

Part 3 Scope

Part 4 Research Approach

Part 5 Definition of the Term "Actuary" in Insurance Legislation

  • Nine of the thirteen jurisdictions define an actuary as an FCIA, as does the ICA; New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island give no definition of a P&C actuary.
  • Exception to the FCIA Requirement in Alberta and British Columbia
    • Alberta's definition is the most extensive (an FCIA in good standing, ordinarily resident in Canada); Alberta and BC let the Minister or FICOM approve a non-FCIA, a clause both regulators said no provincial P&C insurer now relies on.
  • Difference between Life and P&C Actuaries
    • Most provinces see no need to distinguish life and P&C actuaries in legislation.
  • Canadian Residency
    • Most interviewees do not think a residency requirement necessary; OSFI's Guideline E-15 instead expects an appointed actuary to have appropriate Canadian practical experience — work in Canada for at least three of the last six years, one of them valuing Canadian actuarial liabilities.
  • Comments from Other Stakeholders
    • The CIA stressed a consistent definition across jurisdictions and entities; CIA committee members suggested the CIA define the qualification requirements, with regulators adding to them.

Part 6 International Monetary Fund's Financial Sector Assessment of Canada

Part 7 Powers of Provincial Superintendents with Regards to Reserving and Solvency Monitoring Relative to International Sound Practices

  • Provincial P&C Insurers by Jurisdiction
    • 93 Provincial P&C Insurers, including provincial automobile insurers, at December 31, 2011 — 50 of them in Quebec; farm mutuals are not counted.
  • Periodic Reviews of Provincial Insurance Legislation
    • The ICA's sunset clause requires OSFI to review it every five years; BC's Financial Institutions Act is reviewed every ten years and Quebec reports on its Act at least every five, while Alberta, the Northwest Territories and Nunavut have no set review.
  • Approach to Provincial Solvency Supervision
    • Dr. Norma Neilson's 2008 study for PACICC found OSFI the only Canadian prudential regulator in line with IAIS sound practices, with Alberta, BC and Quebec closest among the provinces.
    • A province can leave solvency regulation to the federal regulator (Ontario's and Nova Scotia's choice), resource its own supervision to IAIS standards (Alberta, BC and Quebec), or delegate supervision to another province by service agreement.
  • Consistency of Solvency Regulation and Actuarial Requirements across Canadian Jurisdictions
    • Financial reporting is largely harmonized, but actuarial requirements still vary widely; Neilson warned that unequal solvency regulation could create two classes of insurers and lead PACICC to demand a risk premium.
  • Review of Provincial Insurance Legislation
    • British Columbia (BC)
    • Quebec
    • Alberta
    • Manitoba
    • New Brunswick
    • Newfoundland and Labrador (Newfoundland)
    • Northwest Territories (NWT)
    • Nova Scotia (NS)
    • Nunavut
    • Ontario
    • Prince Edward Island (PEI)
    • Saskatchewan
    • Yukon

Part 8 Review of Regulatory and Legislative Requirements to Assess Solvency under the IAIS common Framework

Appendix A Reference Sources

Appendix B Sample Questionnaire

Appendix C OSFI 2014 Memorandum for the Appointed Actuary's Report on Property and Casualty Insurance Business

Related readings

  • OSFI AA — Guideline E-15, whose appointed-actuary qualifications Part 5 quotes and whose adoption Part 1 lists as a possible enhancement
  • OSFI Stress Testing — Guideline E-18, whose adoption Part 1 lists under ICP 16
  • OSFI ORSA — Guideline E-19, whose adoption Part 1 lists under ICP 16
  • OSFI Target Capital — Guideline A-4, whose adoption Part 1 lists under ICP 16
  • OSFI Corporate Governance — the Corporate Governance Guideline, whose adoption Part 1 lists under ICP 16
  • OSFI Memorandum — the memorandum to the appointed actuary, whose 2014 edition the report reproduces as Appendix C

Sources