Actuarial Notes

Memorandum to the Appointed Actuary (2024)

By Office of the Superintendent of Financial Institutions · 2024

Study guide: Exam 6C

OSFI's expectations for the appointed actuary's report (AAR) on the valuation of actuarial and other policy liabilities of life, P&C and mortgage insurers. Posted on August 22, 2024 for the 2024 AAR, the 2024 memorandum replaced OSFI's separate life and P&C memoranda with a single document of simpler statements of principle. It gives guidance on the text of the AAR that describes the valuation and, for P&C and mortgage insurers, on the detail supporting the regulatory capital tests; insurers submit the AAR in a form determined by the Superintendent under subsection 667(2) of the Insurance Companies Act.

On the syllabus

  • Exam 6C — objectives C1 and C5; the memorandum of August 2024, with no sections excluded.

1 Overview

  • The AAR has three major components: text describing the valuation and the assumptions and considerations employed; exhibits and appendices presenting the quantitative analysis; and the regulatory schedules and supplementary tables OSFI requires.
  • The memorandum covers the first component and the detail supporting the capital tests; OSFI gives no guidance on exhibits and appendices, which appointed actuaries may organize as they choose.
  • The AA should be a Fellow of the Canadian Institute of Actuaries, and the AAR should include the AA's signed expression of opinion on the appropriateness of the actuarial and other policy liabilities in the insurer's financial statements.

2 Generally accepted actuarial practice

  • The Insurance Companies Act requires the AA's work to be in accordance with accepted actuarial practice, which the memorandum takes to be embodied by the Standards of Practice of the Actuarial Standards Board supplemented by CIA educational notes.
  • AAs should identify and justify any departure from accepted actuarial practice or from the memorandum, which does not override or limit accepted actuarial practice in Canada.

3 Our review

  • OSFI may request supplemental detail, reject assumptions or methods and require the liabilities to be recalculated, require the AAR and annual return to be amended and re-filed, or require review by an independent actuary.

4 Required contents of the AAR

  • 4.1 Table of contents
  • 4.2 Identification of the AA
    • Whether the AA is an employee of the insurer or a consultant, how long they have served as its AA, and confirmation of compliance with continuing education requirements.
  • 4.3 Materiality
    • The materiality standard applied, how it was determined, and how it compares with the external audit materiality.
  • 4.4 Expression of opinion
    • The AA's opinion on the valuation of the actuarial and other policy liabilities, in the format specified in the CIA Standards of Practice; OSFI considers any opinion that varies from that wording to be a qualified opinion. See Statement of Actuarial Opinion.
  • 4.5 Changes that influenced the valuation
  • 4.6 Product
  • 4.7 Reinsurance held
    • 4.7.1 Reinsurance arrangements
    • 4.7.2 Accounting for reinsurance held assets and liabilities under IFRS 17
    • 4.7.3 Other IFRSs
    • The AA describes the insurer's reinsurance held and significant changes to it, including arrangements that do not cede insurance risk, unregistered reinsurance and related-party arrangements, and the valuation of reinsurance held assets and liabilities under IFRS 17.
  • 4.8 Data
    • The data used and notable changes from the prior year (for P&C insurers, the treatment of salvage and subrogation, loss adjustment expense and reinsurance in the claims data), and the controls over the adequacy of the data.
  • 4.9 Actual and expected experience
    • 4.9.1 Life insurers
    • 4.9.2 P&C and mortgage insurers
      • Actual and expected experience compares ultimate undiscounted loss estimates at the end of the current fiscal year with those made at prior year-ends, by accident year and line of business, ideally over the most recent ten years, and discusses material differences from the loss development on page 60.45 of the annual return.
  • 4.10 Methodology
    • Includes accounting choices that deviate from industry norms, the major estimation methods (for P&C insurers, for example, development, expected and Bornhuetter-Ferguson), the construction of discount rates, and the determination of the risk adjustment and its confidence level.
  • 4.11 Assumptions
    • Key assumptions, how they are derived, and significant year-over-year changes with their rationale.
  • 4.12 Reliance on the work of others
    • For example on the external auditor for data, on another AA for the valuation of a pool such as Facility Association, or on other employees for assumptions such as discount rates; the AA states their acceptance of the work and any reservations.
  • 4.13 Table of exhibits and appendices

5 Actuarial calculations supporting regulatory capital tests

  • The AA of a P&C or mortgage insurer provides the information used to complete the MCT, branch adequacy of assets test (BAAT) or mortgage insurer capital adequacy test (MICAT) return, and describes how those amounts were determined.

Appendix I Filing directions

  • The AAR and its supplementary tables must be filed within sixty days of the end of the fiscal year, electronically through the Regulatory Reporting System in PDF, with a copy of the signed expression of opinion.
  • P&C and mortgage insurers also submit the Unpaid Claims and Loss Ratio Analysis Exhibit (UCLRE) at the same time.

Appendix II Actuarial items used for MCT/BAAT calculation

  • For PC4 page 50.00, in aggregate: the liabilities and assets for incurred claims and for remaining coverage of insurance contracts issued and reinsurance contracts held, and their modified or effective durations.
  • For page 40.00, by class of insurance: the LIC for insurance contracts issued and the AIC for reinsurance contracts held, each less the risk adjustment; for page 40.05, by class: the unexpired coverage of groups measured using the GMM and the PAA.

Appendix III Actuarial items used for MICAT calculation

Related readings

  • OSFI Minimum Capital — the MCT/BAAT return (PC4), for whose pages 40.00, 40.05 and 50.00 Appendix II lists the actuarial items
  • OSFI Annual Return — the supervisory annual return (PC3), whose page 60.45 §4.9.2 refers to
  • CIA CSOP — the CIA Standards of Practice, whose format §4.4 requires for the expression of opinion

Sources