The P&C Actuary's Role in Solvency Monitoring - Property and ...
The P&C Actuary's Role in Solvency Monitoring - Property and ...
The P&C Actuary's Role in Solvency Monitoring - Property and ...
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PROPERTY AND CASUALTY INSURANCE<br />
COMPENSATION CORPORATION<br />
(PACICC)<br />
<strong>The</strong> P&C Actuary’s <strong>Role</strong> <strong>in</strong> <strong>Solvency</strong> Monitor<strong>in</strong>g<br />
As Set Out <strong>in</strong> Legislation, Regulatory Requirements,<br />
And Professional St<strong>and</strong>ards of Practice<br />
Jacquel<strong>in</strong>e Friedl<strong>and</strong>, FCAS, FCIA, MAAA<br />
(416) 777-8320<br />
Irene Tao, ACAS<br />
(416) 777-8738<br />
KPMG<br />
Bay Adelaide Centre<br />
333 Bay Street, Suite 4600<br />
Toronto, ON M5H 2S5<br />
ORIGINAL RELEASE DATE: JANUARY 11, 2011<br />
REVISED TO INLCUDE UPDATES TO OSFI GUIDELINES<br />
AS OF OCTOBER 1, 2011
PACICC – <strong>The</strong> P&C Actuary’s <strong>Role</strong> <strong>in</strong> <strong>Solvency</strong> Monitor<strong>in</strong>g Page i<br />
TABLE OF CONTENTS<br />
Part 1 – Purpose <strong>and</strong> Scope ......................................................................................................... 1<br />
Part 2 – Research Methodology Process .................................................................................... 2<br />
Part 3 – F<strong>in</strong>ancial Metrics – Federal <strong>and</strong> Prov<strong>in</strong>cial P&C Insurance Companies ....................... 3<br />
Part 4 – Introduction to the Regulation of Insurance Companies <strong>in</strong> Canada ............................... 4<br />
Part 5 – Current Canadian Regulatory Requirements of the Actuary – Federal Regulation ....... 9<br />
Part 6 – Current Canadian Regulatory Requirements of the Actuary – Prov<strong>in</strong>cial Regulation ... 20<br />
Part 7 – <strong>The</strong> Canadian Institute of Actuaries ............................................................................... 26<br />
Part 8 – History of P&C Insurer Insolvency <strong>in</strong> Canada .............................................................. 42<br />
Appendices<br />
A – Reference Sources ................................................................................................................ 44<br />
B – CIA Guid<strong>in</strong>g Pr<strong>in</strong>ciples ........................................................................................................ 47<br />
C – OSFI 2010 Memor<strong>and</strong>um for the Appo<strong>in</strong>ted Actuary’s Report on <strong>Property</strong> <strong>and</strong> Casualty<br />
Insurance Bus<strong>in</strong>ess ...................................................................................................................... 48
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PART 1 – PURPOSE AND SCOPE<br />
Purpose<br />
<strong>The</strong> <strong>Property</strong> <strong>and</strong> Casualty Insurance Compensation Corporation (PACICC) is <strong>in</strong>terested <strong>in</strong><br />
determ<strong>in</strong><strong>in</strong>g if there is a relationship between the f<strong>in</strong>ancial solidity of property <strong>and</strong> casualty<br />
(P&C) <strong>in</strong>surers who use the services of actuaries <strong>and</strong> those that do not. <strong>The</strong> role of the actuary<br />
with Canadian P&C <strong>in</strong>surance companies is greatly <strong>in</strong>fluenced by the requirements set out <strong>in</strong><br />
legislative acts <strong>and</strong> regulations as well as by the professional requirements established by the<br />
Canadian Institute of Actuaries (CIA or Institute).<br />
PACICC requested KPMG LLP (KPMG) to prepare a research report address<strong>in</strong>g the follow<strong>in</strong>g:<br />
― Summary of current Canadian regulatory requirements 1 of the actuary directed at solvency<br />
― History of changes over the past 20 to 25 years <strong>in</strong> actuarial requirements as m<strong>and</strong>ated by the<br />
CIA<br />
― Effect of changes <strong>in</strong> actuarial requirements, either emanat<strong>in</strong>g from regulatory requirements or<br />
the CIA, on the solvency of Canadian <strong>in</strong>surers<br />
Organization of Report<br />
We organize this report <strong>in</strong> the follow<strong>in</strong>g eight parts:<br />
1. Purpose <strong>and</strong> scope<br />
2. Research methodology process<br />
3. F<strong>in</strong>ancial metrics – federal <strong>and</strong> prov<strong>in</strong>cial P&C <strong>in</strong>surance companies<br />
4. Introduction to the regulation of <strong>in</strong>surance companies <strong>in</strong> Canada<br />
5. Current Canadian regulatory requirements of the actuary – federal regulation<br />
6. Current Canadian regulatory requirements of the actuary – prov<strong>in</strong>cial regulation<br />
7. <strong>The</strong> Canadian Institute of Actuaries<br />
8. History of P&C <strong>in</strong>surer <strong>in</strong>solvency <strong>in</strong> Canada<br />
Limitation of Scope<br />
It is important to recognize that PACICC’s request of KPMG has a very narrow focus. Our<br />
objective is to review the role of the P&C actuary as def<strong>in</strong>ed by regulatory <strong>and</strong> professional<br />
requirements <strong>and</strong> to seek potential l<strong>in</strong>ks between the effect of changes <strong>in</strong> actuarial requirements<br />
<strong>and</strong> the solvency of Canadian P&C <strong>in</strong>surers.<br />
1 Throughout this report, the terms “regulatory requirements” <strong>and</strong> “regulation” are typically used <strong>in</strong> a broad<br />
sense to refer to both legislative acts as well as requirements set out by super<strong>in</strong>tendents of <strong>in</strong>surance <strong>in</strong><br />
directives, guidel<strong>in</strong>es, bullet<strong>in</strong>s, memor<strong>and</strong>um, <strong>and</strong> other forms of guidance.
PACICC – <strong>The</strong> P&C Actuary’s <strong>Role</strong> <strong>in</strong> <strong>Solvency</strong> Monitor<strong>in</strong>g Page 2<br />
PART 2 – RESEARCH METHODOLOGY PROCESS<br />
To complete this research assignment, we conducted a literature review <strong>and</strong> personal <strong>in</strong>terviews.<br />
Through the <strong>in</strong>ternet as well as through discussions with experienced actuarial practitioners <strong>in</strong> the<br />
<strong>in</strong>dustry, we identified relevant reports, articles, regulations, <strong>and</strong> guidel<strong>in</strong>es. We <strong>in</strong>clude a<br />
complete list of all reference resources <strong>in</strong> Appendix A of this paper.<br />
We reached out by telephone <strong>and</strong> email to prov<strong>in</strong>cial regulators. Specifically, we contacted the<br />
regulators <strong>in</strong> the follow<strong>in</strong>g prov<strong>in</strong>ces:<br />
― Alberta<br />
― Manitoba<br />
― New Brunswick<br />
― Nova Scotia<br />
― Newfoundl<strong>and</strong><br />
― Ontario<br />
― Pr<strong>in</strong>ce Edward Isl<strong>and</strong><br />
When speak<strong>in</strong>g with regulators <strong>in</strong> each of the above prov<strong>in</strong>ces, we requested <strong>in</strong>formation on P&C<br />
<strong>in</strong>surers <strong>in</strong>corporated <strong>in</strong> the prov<strong>in</strong>ce (i.e., prov<strong>in</strong>cially regulated <strong>in</strong>surers). For each prov<strong>in</strong>ce, we<br />
asked the follow<strong>in</strong>g four questions:<br />
1. Is a report on dynamic capital adequacy test<strong>in</strong>g (DCAT) required on an annual basis?<br />
2. Is there a requirement for the submission of an actuarial report <strong>and</strong> op<strong>in</strong>ion statement as to<br />
the adequacy of policy liabilities with the annual return?<br />
3. Is there a requirement to follow the m<strong>in</strong>imum capital test (MCT) guidel<strong>in</strong>es set out by the<br />
Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions (OSFI) or similar guidel<strong>in</strong>es?<br />
4. Is actuarial external review (i.e., peer review) required for actuarial reports?<br />
We did not reach out to British Columbia or Quebec as the necessary <strong>in</strong>formation was readily<br />
available on their web sites. We also did not reach out to regulators <strong>in</strong> the territories as it is our<br />
underst<strong>and</strong><strong>in</strong>g that there are no <strong>in</strong>surers <strong>in</strong>corporated <strong>in</strong> the territories.<br />
To underst<strong>and</strong> the evolution of professional requirements at the CIA, we met with William<br />
Wiel<strong>and</strong> <strong>and</strong> David Oakden. Both Mr. Wiel<strong>and</strong> <strong>and</strong> Mr. Oakden are long-time volunteers who<br />
have held numerous senior leadership roles with<strong>in</strong> the CIA. We also conducted an extensive<br />
review of the archived st<strong>and</strong>ards of practice of the CIA as well as the activity of the past decade.
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PART 3 – FINANCIAL METRICS – FEDERAL AND<br />
PROVINCIAL P&C INSURANCE COMPANIES<br />
<strong>The</strong> purpose of this part of the report is to provide a sense of the relative magnitude of P&C<br />
companies that are federally regulated versus companies that are prov<strong>in</strong>cially regulated. In<br />
Table 1, we present key f<strong>in</strong>ancial metrics based on MSA Research Inc. 2 year-end 2009 data for<br />
P&C companies <strong>in</strong> three categories:<br />
― Federally regulated companies<br />
― Prov<strong>in</strong>cially regulated other than prov<strong>in</strong>cial automobile <strong>in</strong>surance companies<br />
― Insurance Corporation of British Columbia <strong>and</strong> Saskatchewan Auto Fund 3<br />
As evident from the table below, more than 75% of the total premium volume <strong>in</strong> Canada is<br />
written by companies that are subject to federal regulation, roughly 10% is written by two of the<br />
largest prov<strong>in</strong>cial automobile <strong>in</strong>surance companies, <strong>and</strong> about 12% by other prov<strong>in</strong>cially<br />
regulated companies.<br />
Table 1 – F<strong>in</strong>ancial Metrics<br />
Federally<br />
Prov<strong>in</strong>cially<br />
Prov<strong>in</strong>cial<br />
($000)<br />
Regulated<br />
Regulated Auto Insurers<br />
Net Written Premium 32,433,138 5,046,228 4,318,564<br />
Gross Unpaid Claims 57,371,376 4,440,097 6,888,401<br />
Total Assets 120,114,940 12,273,232 14,140,407<br />
Surplus 34,650,252 3,788,085 3,818,934<br />
Dur<strong>in</strong>g 2009, there were 149 prov<strong>in</strong>cially regulated P&C <strong>in</strong>surers (<strong>in</strong>clud<strong>in</strong>g prov<strong>in</strong>cial<br />
automobile <strong>in</strong>surers) <strong>in</strong> Canada. Table 2 illustrates the distribution of these <strong>in</strong>surers by prov<strong>in</strong>ce. 4<br />
Table 2 – P&C Insurers by Prov<strong>in</strong>ce<br />
BC AB SK MB ON PQ NB NS PE NF Ter<br />
Insurers 8 8 12 2 56 51 5 0 2 2 0<br />
Public Auto Insurers 1 0 1 1 0 0 0 0 0 0 0<br />
Total 9 8 13 3 56 51 5 0 2 2 0<br />
2<br />
MSA Research Inc. is a Canadian-owned, <strong>in</strong>dependent analytical research firm that is focused on the<br />
Canadian <strong>in</strong>surance <strong>in</strong>dustry.<br />
3<br />
Data for Manitoba Public Insurance (MPI) <strong>and</strong> Societe d’assurance automobile du Quebec were not<br />
<strong>in</strong>cluded <strong>in</strong> the database of MSA Research Inc. F<strong>in</strong>ancial <strong>in</strong>formation for MPI is publicly available on its<br />
web site.<br />
4<br />
Data provided by Darrell Leadbetter of PACICC. Note, these numbers vary somewhat from those<br />
provided by the prov<strong>in</strong>cial regulators.
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PART 4 – INTRODUCTION TO THE REGULATION OF<br />
INSURANCE COMPANIES IN CANADA<br />
Shar<strong>in</strong>g of Responsibilities at the Federal <strong>and</strong> Prov<strong>in</strong>cial Levels<br />
In Canada, the federal <strong>and</strong> prov<strong>in</strong>cial governments share the responsibility for the supervision of<br />
<strong>in</strong>surance companies. Federal <strong>in</strong>surance regulation controls certa<strong>in</strong> activities of all federally<br />
<strong>in</strong>corporated companies <strong>and</strong> all non-resident companies. “<strong>The</strong> objective of the federal legislation<br />
is to try to ensure to the extent possible that federally supervised companies rema<strong>in</strong> able to meet<br />
their obligations to their policyholders.” 5 For federally regulated <strong>in</strong>surance companies, OSFI is<br />
responsible for f<strong>in</strong>ancial solvency supervision.<br />
Prov<strong>in</strong>ces have responsibilities similar to those of OSFI, typically <strong>in</strong> the form of Super<strong>in</strong>tendents<br />
of Insurance, for <strong>in</strong>surers <strong>in</strong>corporated <strong>in</strong> their jurisdictions. In addition to regulatory<br />
requirements directed at solvency, prov<strong>in</strong>cial regulation is aimed at matters such as:<br />
― Licens<strong>in</strong>g of <strong>in</strong>surance companies<br />
― Terms <strong>and</strong> conditions of <strong>in</strong>surance contracts <strong>and</strong> their <strong>in</strong>terpretations<br />
― Licens<strong>in</strong>g of agents, brokers, <strong>and</strong> claims adjusters<br />
― Sales practices <strong>and</strong> <strong>in</strong>formation disclosure<br />
― Claim settlement practices<br />
― Compulsory <strong>in</strong>surance coverage <strong>and</strong> residual markets<br />
― Fil<strong>in</strong>g <strong>and</strong> approval of premium rates<br />
Prov<strong>in</strong>cial regulation on these topics applies equally to prov<strong>in</strong>cially regulated <strong>and</strong> federally<br />
regulated companies.<br />
Insurers are required to satisfy the solvency requirements of the jurisdiction of their <strong>in</strong>corporation<br />
as well as each prov<strong>in</strong>ce <strong>in</strong> which they are licensed. At a federal level, the relevant legislation<br />
<strong>in</strong>cludes:<br />
― Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions Act 6<br />
― Insurance Companies Act of Canada (ICA)<br />
J. Brian Reeve, Esq. comments on the Canadian model of <strong>in</strong>surance regulation <strong>in</strong> his paper<br />
“Canadian Insurance Regulation: <strong>The</strong> Change to a Risk Based Approach.” He states:<br />
Canada provides a good model for effective <strong>in</strong>surance regulation. Our dual<br />
system of regulation has slowly evolved from be<strong>in</strong>g <strong>in</strong>efficient with significant<br />
overlaps to be<strong>in</strong>g reasonably well harmonized. <strong>The</strong> Canadian Council of<br />
Insurance Regulators had done an effective job of st<strong>and</strong>ardiz<strong>in</strong>g many areas of<br />
<strong>in</strong>surance regulation. OSFI has emerged as the dom<strong>in</strong>ant <strong>in</strong>surance solvency<br />
regulator <strong>in</strong> Canada <strong>and</strong> has significant resources <strong>and</strong> experience that most<br />
prov<strong>in</strong>cial departments of <strong>in</strong>surance are unable to match. As a result, there has<br />
5<br />
Robert M. Hammond, federal Super<strong>in</strong>tendent of Insurance (1983), luncheon address at the November<br />
1983 CAS annual meet<strong>in</strong>g titled “Insurance Regulation <strong>in</strong> Canada <strong>and</strong> the <strong>Role</strong> of the Casualty Actuary,”<br />
PCAS, LXX, pages 289-296, (Hammond 1983).<br />
6<br />
<strong>The</strong> federal act that established the powers of the Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions<br />
(OSFI) <strong>in</strong> 1987.
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been a cont<strong>in</strong>u<strong>in</strong>g trend to delegate <strong>and</strong> transfer authority <strong>in</strong> many areas of<br />
<strong>in</strong>surance regulation to OSFI. <strong>The</strong> role of prov<strong>in</strong>cial departments of <strong>in</strong>surance is<br />
appropriately focused on distribution issues such as market conduct <strong>and</strong><br />
consumer protection. 7<br />
Collaborative Approach to Regulation<br />
<strong>The</strong> approach to <strong>in</strong>surance regulation <strong>in</strong> Canada is a collaborative process between the federal <strong>and</strong><br />
prov<strong>in</strong>cial super<strong>in</strong>tendents of f<strong>in</strong>ancial <strong>in</strong>stitutions, representatives from the CIA <strong>and</strong> the<br />
Canadian Institute of Chartered Accountants (CICA), as well as representatives from the<br />
<strong>in</strong>surance <strong>in</strong>dustry (such as the Insurance Bureau of Canada). <strong>The</strong>re are work<strong>in</strong>g groups,<br />
committees, <strong>and</strong> task forces that operate with representatives from all organizations. Some of<br />
these groups are set up for a def<strong>in</strong>ed period of time to address a specific issue. Other groups meet<br />
on a regular basis to discuss key issues <strong>and</strong> potential changes <strong>in</strong> regulatory, account<strong>in</strong>g, actuarial<br />
<strong>and</strong> other practices.<br />
Change by one organization is often complemented by actions <strong>in</strong> other organizations. For<br />
example, a change <strong>in</strong> regulatory requirements may be followed by a change <strong>in</strong> actuarial st<strong>and</strong>ards<br />
of practice, <strong>and</strong> possibly support<strong>in</strong>g guidance from the CIA <strong>in</strong> the form of research papers or<br />
educational notes. Similarly, changes <strong>in</strong> account<strong>in</strong>g st<strong>and</strong>ards may be accompanied by changes <strong>in</strong><br />
regulatory requirements <strong>and</strong> also changes <strong>in</strong> actuarial st<strong>and</strong>ards of practice. It is often difficult to<br />
determ<strong>in</strong>e which organization orig<strong>in</strong>ates the change. What is more important, <strong>and</strong> has been more<br />
important to the success of the Canadian regulatory environment, is the cont<strong>in</strong>ual <strong>in</strong>teraction<br />
between the key parties.<br />
<strong>The</strong> 1980s<br />
P&C <strong>in</strong>surers were first required to file annual statements <strong>in</strong> a proscribed format as set out by the<br />
federal regulator <strong>in</strong> the early 1980s. In these f<strong>in</strong>ancial statements, the liabilities were required to<br />
<strong>in</strong>clude unearned premiums <strong>and</strong> a provision for claims, <strong>in</strong>clud<strong>in</strong>g a provision for claims <strong>in</strong>curred<br />
but not reported. At that time, there were different requirements for life <strong>in</strong>surers <strong>and</strong> P&C<br />
<strong>in</strong>surers. Life <strong>in</strong>surance companies were required to appo<strong>in</strong>t a valuation actuary, who was<br />
m<strong>and</strong>ated to be a Fellow of the CIA (FCIA), to certify the adequacy of the actuarial reserves <strong>and</strong><br />
the appropriateness of the assumptions. <strong>The</strong>re was no similar requirement for professional<br />
certification as to the adequacy of the claims <strong>and</strong> unearned premium reserves for P&C <strong>in</strong>surance<br />
companies.<br />
Follow<strong>in</strong>g the poor f<strong>in</strong>ancial results of the P&C <strong>in</strong>dustry <strong>in</strong> 1981 <strong>and</strong> 1982, <strong>in</strong>clud<strong>in</strong>g the failure<br />
of three federally registered companies <strong>and</strong> two prov<strong>in</strong>cially registered companies, several<br />
proposals for legislative reform were put forward by the federal Super<strong>in</strong>tendent of Insurance.<br />
7 Federation of Regulatory Counsel, Inc., Vol. 14, Edition 3 – Fall 2003,<br />
http://www.forc.org/public/journals/14, accessed November 2010.
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<strong>The</strong>se <strong>in</strong>itiatives were directed at:<br />
― Initial <strong>and</strong> cont<strong>in</strong>u<strong>in</strong>g capital <strong>and</strong> surplus requirements<br />
― <strong>The</strong> adequacy of security provided by re<strong>in</strong>surance arrangements as well as <strong>in</strong>centives for<br />
direct writ<strong>in</strong>g companies to write good quality bus<strong>in</strong>ess<br />
― Quality <strong>and</strong> collectability of assets<br />
― <strong>The</strong> adequacy of claims <strong>and</strong> other reserves 8<br />
It was recognized that the adequacy of claims reserves was fundamental to the f<strong>in</strong>ancial health of<br />
P&C <strong>in</strong>surance companies. Thus, it was proposed that P&C <strong>in</strong>surers be required to provide an<br />
annual certificate signed by an appropriately qualified actuary. At the November 1983 CAS<br />
annual meet<strong>in</strong>g, Robert Hammond (federal Super<strong>in</strong>tendent of Insurance) stated that it was<br />
anticipated that “the person sign<strong>in</strong>g the certificate will be required to state that <strong>in</strong> his or her<br />
op<strong>in</strong>ion, the provision for outst<strong>and</strong><strong>in</strong>g claims represents a fair <strong>and</strong> reasonable estimate of the<br />
amounts that, together with amounts to be recovered from re<strong>in</strong>surers, will be required to settle the<br />
claims.” 9 Hammond noted that the objective of such a requirement was to focus greater attention<br />
on the adequacy of claims reserves <strong>and</strong> to encourage more direct <strong>in</strong>volvement <strong>in</strong> the <strong>in</strong>dustry of<br />
actuaries qualified <strong>in</strong> the P&C field.<br />
Hammond also discussed the importance of re<strong>in</strong>surance to P&C <strong>in</strong>surers:<br />
Re<strong>in</strong>surance is so important to the f<strong>in</strong>ancial soundness of most property <strong>and</strong><br />
casualty <strong>in</strong>surance companies that we th<strong>in</strong>k we must <strong>in</strong>sist that the actuary<br />
exp<strong>and</strong> his certificate beyond the net reserves reta<strong>in</strong>ed by the company. We th<strong>in</strong>k<br />
that the actuary must review the adequacy <strong>and</strong> the appropriateness of the<br />
re<strong>in</strong>surance arrangements <strong>and</strong> be prepared to express a view on the recoverability<br />
of amounts that will be due from re<strong>in</strong>surers. 10<br />
Hammond cont<strong>in</strong>ued:<br />
We acknowledge that these proposals regard<strong>in</strong>g required reports from casualty<br />
actuaries need to be ref<strong>in</strong>ed. Certa<strong>in</strong>ly, before anyth<strong>in</strong>g is put <strong>in</strong>to legislation, we<br />
plan to discuss our proposals <strong>in</strong> detail with the profession. I th<strong>in</strong>k the important<br />
po<strong>in</strong>t is that we see our proposals as be<strong>in</strong>g a step towards requir<strong>in</strong>g more<br />
actuarial <strong>in</strong>volvement <strong>in</strong> the property <strong>and</strong> casualty <strong>in</strong>dustry <strong>in</strong> Canada. Reliance<br />
on the professionalism of the actuary has been one of the cornerstones <strong>in</strong> the<br />
development of the exist<strong>in</strong>g supervisory system <strong>in</strong> Canada for life <strong>in</strong>surance<br />
companies <strong>and</strong> I believe that we should be mov<strong>in</strong>g <strong>in</strong> the same direction for the<br />
property <strong>and</strong> casualty <strong>in</strong>dustry.<br />
One of the practical problems we must face <strong>in</strong> mov<strong>in</strong>g <strong>in</strong> this direction is the lack<br />
of actuaries <strong>in</strong> Canada qualified to practice <strong>in</strong> the casualty field. For this reason,<br />
the proposals as orig<strong>in</strong>ally published suggested that <strong>in</strong> certa<strong>in</strong> specified<br />
circumstances, <strong>and</strong> with the approval of the Super<strong>in</strong>tendent, an op<strong>in</strong>ion from<br />
8 Hammond 1983.<br />
9 Hammond 1983.<br />
10 Hammond 1983.
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someone other than an actuary might be accepted. I view this option as be<strong>in</strong>g<br />
only part of a transition stage until such time as there are a sufficient number of<br />
qualified actuaries practic<strong>in</strong>g <strong>in</strong> Canada to meet the need. 11<br />
At the end of Hammond’s speech, he noted that “we are currently try<strong>in</strong>g to recruit a casualty<br />
actuary for the Department’s staff.” 12<br />
<strong>The</strong> 1990s<br />
As noted, most of the <strong>in</strong>itial efforts <strong>in</strong> Canada directed at solvency test<strong>in</strong>g were focused on life<br />
<strong>in</strong>surance companies. This was a jo<strong>in</strong>t effort of regulatory <strong>in</strong>itiatives <strong>and</strong> developments <strong>in</strong> the<br />
CIA st<strong>and</strong>ards of practice directed at actuaries work<strong>in</strong>g with life <strong>in</strong>surance companies. <strong>The</strong>re is a<br />
long-st<strong>and</strong><strong>in</strong>g tradition, spann<strong>in</strong>g more than two decades, of collaboration between the CIA <strong>and</strong><br />
regulators, particularly at the federal level, to ensure the f<strong>in</strong>ancial strength of Canadian <strong>in</strong>surance<br />
companies.<br />
<strong>The</strong> failures of the early 1980s resulted <strong>in</strong> changes to the ICA <strong>in</strong> the follow<strong>in</strong>g decade: 13<br />
― Surplus test provisions were strengthened by provid<strong>in</strong>g for m<strong>in</strong>imums based on written<br />
premiums <strong>and</strong> <strong>in</strong>curred claims as well as the exist<strong>in</strong>g marg<strong>in</strong>s on reserves<br />
― Regulations were issued to address the excessive use of re<strong>in</strong>surance as well as the use of<br />
unregistered re<strong>in</strong>surance<br />
― Actuarial certification of the adequacy of outst<strong>and</strong><strong>in</strong>g claims <strong>and</strong> unearned premium<br />
provisions was required for all P&C <strong>in</strong>surance companies’ 1992 annual statements<br />
Another <strong>in</strong>itiative result<strong>in</strong>g from the failures of the early 1980s was the creation of PACICC. 14<br />
Bill C-28, which was <strong>in</strong>troduced <strong>in</strong> Parliament on June 19, 1991, <strong>in</strong>troduced the concept of the<br />
appo<strong>in</strong>ted actuary (AA). Accord<strong>in</strong>g to this Bill, the AA had report<strong>in</strong>g duties beyond the<br />
traditional reserve certification duties: 15<br />
― <strong>The</strong> AA must report on the value of actuarial <strong>and</strong> other policy liabilities of the company at the<br />
end of the f<strong>in</strong>ancial year accord<strong>in</strong>g to generally accepted actuarial practice<br />
― <strong>The</strong> AA should report on the f<strong>in</strong>ancial condition of the company, <strong>in</strong>clud<strong>in</strong>g the expected<br />
future f<strong>in</strong>ancial condition of the company (commonly known as the report on dynamic capital<br />
adequacy test<strong>in</strong>g, or DCAT report)<br />
― <strong>The</strong> AA should report on any matters that have come to the actuary’s attention, that, <strong>in</strong> the<br />
actuary’s op<strong>in</strong>ion, have material adverse effect on the f<strong>in</strong>ancial position of the company <strong>and</strong><br />
require rectification<br />
11 Hammond 1983.<br />
12 Hammond 1983.<br />
13 “<strong>Solvency</strong> Regulation <strong>in</strong> Canada” by CIA P&C <strong>Solvency</strong> Subcommittee consist<strong>in</strong>g of R. Gauthier, B.<br />
Addie, J. Côté, A. Lessard, <strong>and</strong> C. Townsend, May 1992.<br />
14 “<strong>Solvency</strong> Regulation <strong>in</strong> Canada,” May 1992.<br />
15 “<strong>Solvency</strong> Regulation <strong>in</strong> Canada,” May 1992.
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Initially, the requirement for a DCAT report did not apply to all <strong>in</strong>surance companies, <strong>in</strong>stead it<br />
was noted that such a report may be required for a particular company by the regulator. <strong>The</strong><br />
changes implemented <strong>in</strong> the 1990s to the ICA cont<strong>in</strong>ue to exist <strong>in</strong> large part today, with the<br />
extension of the requirement for DCAT reports to all federally regulated <strong>in</strong>surers.<br />
<strong>The</strong> 2000s<br />
<strong>The</strong>re were several significant <strong>in</strong>itiatives <strong>in</strong> the 2000s. Until 2003, OSFI directed that the<br />
valuation of policy liabilities should not reflect the time value of money. 16 Effective January 1,<br />
2003, federally regulated P&C <strong>in</strong>surers started <strong>in</strong>clud<strong>in</strong>g discounted policy liabilities <strong>in</strong> their<br />
f<strong>in</strong>ancial statements. OSFI implemented the m<strong>in</strong>imum capital test (MCT) at year-end 2003 <strong>and</strong><br />
m<strong>and</strong>ated external review of AA reports start<strong>in</strong>g with the 2003 actuarial reports.<br />
<strong>The</strong>re were important account<strong>in</strong>g changes effective for annual <strong>and</strong> <strong>in</strong>terim account<strong>in</strong>g periods <strong>in</strong><br />
fiscal years beg<strong>in</strong>n<strong>in</strong>g on or after October 1, 2006. <strong>The</strong> Account<strong>in</strong>g St<strong>and</strong>ards Board (AcSB)<br />
<strong>in</strong>troduced new st<strong>and</strong>ards to address when an entity would recognize a f<strong>in</strong>ancial <strong>in</strong>strument on its<br />
balance sheet <strong>and</strong> how the f<strong>in</strong>ancial <strong>in</strong>strument would be measured once recognized. <strong>The</strong> new<br />
st<strong>and</strong>ards <strong>in</strong>cluded the follow<strong>in</strong>g sections <strong>in</strong> the CICA St<strong>and</strong>ards <strong>and</strong> Guidance Collection:<br />
― CICA 3855, F<strong>in</strong>ancial Instruments – Recognition <strong>and</strong> Measurement<br />
― CICA 1530, Comprehensive Income<br />
While <strong>in</strong>surance contracts were excluded from the scope of the new account<strong>in</strong>g st<strong>and</strong>ards, <strong>and</strong><br />
thus not directly affected, the use by actuaries of a portfolio-based discount rate <strong>in</strong> the<br />
determ<strong>in</strong>ation of the actuarial present value of the policy liabilities resulted <strong>in</strong> an <strong>in</strong>direct effect.<br />
16 P&C Loss Reserve Discount<strong>in</strong>g Canadian Perspective, Claudette Cant<strong>in</strong>, CIA Spr<strong>in</strong>g Meet<strong>in</strong>g, June 18,<br />
2008.
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PART 5 – CURRENT CANADIAN REGULATORY<br />
REQUIREMENTS OF THE ACTUARY – FEDERAL<br />
REGULATION<br />
Requirements for P&C actuaries work<strong>in</strong>g with federally regulated P&C <strong>in</strong>surance companies arise from<br />
acts <strong>and</strong> regulations as well as other forms of guidance issued by OSFI, <strong>in</strong>clud<strong>in</strong>g but not limited to: 17<br />
― Guidel<strong>in</strong>es <strong>and</strong> related advisories<br />
― Regulatory <strong>and</strong> legislative advisories<br />
― Rul<strong>in</strong>gs<br />
― Supervisory advisories<br />
In this part of our report, we describe the sections of the ICA that are relevant to actuaries,<br />
numerous guidel<strong>in</strong>es that have applicability to actuaries, <strong>and</strong> OSFI’s Memor<strong>and</strong>um for the<br />
Appo<strong>in</strong>ted Actuary’s Report on <strong>Property</strong> <strong>and</strong> Casualty Insurance Bus<strong>in</strong>ess. We focus on<br />
present<strong>in</strong>g a summary of current regulatory requirements as opposed to the evolution of such<br />
requirements.<br />
Insurance Companies Act of Canada<br />
For federally regulated <strong>in</strong>surers, the role of the actuary is enshr<strong>in</strong>ed <strong>in</strong> the ICA. <strong>The</strong> requirement<br />
to appo<strong>in</strong>t an actuary is set out <strong>in</strong> the first section of Part IV – Organization <strong>and</strong> Commencement.<br />
Specifically, Section 49(1) (First directors’ meet<strong>in</strong>g) states: “After letters patent <strong>in</strong>corporat<strong>in</strong>g a<br />
company or society are issued, a meet<strong>in</strong>g of the directors of the company or society shall be held<br />
at which the directors shall appo<strong>in</strong>t an actuary to be the actuary of the company or society.” <strong>The</strong><br />
company must notify the Super<strong>in</strong>tendent, <strong>in</strong> writ<strong>in</strong>g, of the appo<strong>in</strong>tment (357, 623(1)). 18<br />
Details regard<strong>in</strong>g the actuarial role <strong>and</strong> responsibilities are set out <strong>in</strong> Part VI – Corporate<br />
Governance, Division XIV – Actuaries, which is organized as follows:<br />
― Appo<strong>in</strong>tment<br />
― Notice of appo<strong>in</strong>tment<br />
― Officer precluded<br />
― Chief f<strong>in</strong>ancial officer<br />
― Vacancies<br />
― Revocation of appo<strong>in</strong>tment<br />
― Ceas<strong>in</strong>g to hold office<br />
― Fil<strong>in</strong>g vacancy<br />
― Statement of actuary<br />
― Duty of replacement actuary<br />
17<br />
http://www.osfi-bsif.gc.ca/osfi/<strong>in</strong>dex_e.aspx?DetalId=178, “<strong>Property</strong> <strong>and</strong> Casualty Insurance Companies<br />
Section,” accessed November 2010.<br />
18<br />
Applicable sections of the ICA are noted parenthetically.
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― Valuations <strong>and</strong> reports<br />
― Actuary’s valuation<br />
― Super<strong>in</strong>tendent may appo<strong>in</strong>t actuary<br />
― Right to <strong>in</strong>formation<br />
― Actuary’s report<br />
― Report to directors<br />
― Report to officers<br />
― Qualified privilege<br />
― Qualified privilege for statements<br />
In the ICA, the actuary is def<strong>in</strong>ed to be a “Fellow of the Canadian Institute of Actuaries” (2(1))<br />
(FCIA). <strong>The</strong> actuary is required to value the actuarial <strong>and</strong> other policy liabilities of the company<br />
as at the end of a f<strong>in</strong>ancial year <strong>and</strong> any other matter specified <strong>in</strong> any direction that may be made<br />
by the Super<strong>in</strong>tendent. <strong>The</strong> ICA specifies that the actuary’s valuation shall be <strong>in</strong> accordance with<br />
generally accepted actuarial practice with such changes as may be determ<strong>in</strong>ed by the<br />
Super<strong>in</strong>tendent <strong>and</strong> any additional directions that may be made by the Super<strong>in</strong>tendent (365, 629).<br />
<strong>The</strong> actuary’s right to <strong>in</strong>formation is specified <strong>in</strong> the ICA (366(1)). Upon request of the actuary of<br />
a company, the present or former directors, officers, employees or representatives of the company<br />
shall, to the extent that they are reasonably able to do so, permit access to such records held by<br />
the company, <strong>and</strong> provide such <strong>in</strong>formation <strong>and</strong> explanations that are, <strong>in</strong> the op<strong>in</strong>ion of the<br />
actuary, necessary to enable the actuary to perform the duties of actuary of the company.<br />
<strong>The</strong> ICA m<strong>and</strong>ates the time frame <strong>in</strong> which the actuary must present his or her report (not less<br />
than twenty-one days before the date of the annual meet<strong>in</strong>g of the shareholders <strong>and</strong> policyholders<br />
of the company) (367(1)). While the ICA states that the actuary shall make a report <strong>in</strong> the<br />
“prescribed form,” such form is set out <strong>in</strong> an annual memor<strong>and</strong>um from OSFI <strong>and</strong> not <strong>in</strong> the ICA<br />
itself. <strong>The</strong> actuary’s report is required to state whether, <strong>in</strong> the actuary’s op<strong>in</strong>ion, the annual<br />
statement fairly presents the results of the valuation (367(2)).<br />
Accord<strong>in</strong>g to the ICA, the actuary of a company is required to meet either with the directors of the<br />
company or, where the directors so choose, with the audit committee of the company at least once<br />
dur<strong>in</strong>g each f<strong>in</strong>ancial year. <strong>The</strong> purpose of such meet<strong>in</strong>gs is to report, <strong>in</strong> accordance with<br />
generally accepted actuarial practice <strong>and</strong> any direction that may be made by the Super<strong>in</strong>tendent,<br />
on the f<strong>in</strong>ancial position of the company <strong>and</strong>, where so specified <strong>in</strong> such a direction, the expected<br />
future f<strong>in</strong>ancial condition of the company (368). <strong>The</strong> actuarial report on the f<strong>in</strong>ancial position is<br />
more commonly known as the DCAT report.<br />
<strong>The</strong> actuary of a company is required (by the ICA) to report <strong>in</strong> writ<strong>in</strong>g to the chief executive<br />
officer <strong>and</strong> chief f<strong>in</strong>ancial officer of the company any matters that have come to the actuary’s<br />
attention <strong>in</strong> the course of carry<strong>in</strong>g out the actuary’s duties <strong>and</strong> that <strong>in</strong> the actuary’s op<strong>in</strong>ion have<br />
material adverse effects on the f<strong>in</strong>ancial condition of the company <strong>and</strong> require rectification<br />
(369(1)). An actuary of a company who makes such a report is required to provide a copy of it to<br />
the directors of the company (369(2)). Where, <strong>in</strong> the op<strong>in</strong>ion of the actuary of the company,<br />
suitable action is not taken to rectify the matters referred to <strong>in</strong> such a report, the actuary is<br />
required to send a copy of the report to the Super<strong>in</strong>tendent <strong>and</strong> advise the directors that the<br />
actuary has done so (369(3)).<br />
Similar requirements exist for foreign companies as set out <strong>in</strong> Part XIII – Foreign Companies.
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Further requirements for actuarial report<strong>in</strong>g are outl<strong>in</strong>ed <strong>in</strong> Part XV – Regulation of Companies,<br />
Societies, Foreign Companies <strong>and</strong> Prov<strong>in</strong>cial Companies – Super<strong>in</strong>tendent. Specifically, Section<br />
667(2) requires: “<strong>The</strong> actuary of a company, society, foreign company or prov<strong>in</strong>cial company<br />
shall make, <strong>and</strong> the company, society, foreign company or prov<strong>in</strong>cial company shall file with its<br />
annual return, a report <strong>in</strong> a form determ<strong>in</strong>ed by the Super<strong>in</strong>tendent on the reserve.” <strong>The</strong> liabilities<br />
shown <strong>in</strong> the annual return are required to <strong>in</strong>clude as a reserve the value of the actuarial <strong>and</strong> other<br />
policy liabilities (667(1)).<br />
OSFI Guidel<strong>in</strong>es<br />
OSFI publishes guidel<strong>in</strong>es, which are essentially best or prudent practices, that it<br />
expects f<strong>in</strong>ancial <strong>in</strong>stitutions to follow. Guidel<strong>in</strong>es are used to set st<strong>and</strong>ards to<br />
govern <strong>in</strong>dustry activities <strong>and</strong> behaviour. <strong>The</strong>se <strong>in</strong>clude solvency st<strong>and</strong>ards<br />
(capital adequacy), prudential st<strong>and</strong>ards (large exposure limits, portfolio mix),<br />
<strong>and</strong> account<strong>in</strong>g st<strong>and</strong>ards (e.g., non-accrual loans, transfer of assets, etc.). 19<br />
OSFI also issues guidel<strong>in</strong>es related to corporate governance, also categorized (by OSFI) as<br />
“Sound Bus<strong>in</strong>ess <strong>and</strong> F<strong>in</strong>ancial Practices.” 20 In this section, we highlight OSFI guidel<strong>in</strong>es that<br />
either directly or <strong>in</strong>directly address solvency requirements <strong>and</strong> are of relevance to P&C actuaries.<br />
We describe the follow<strong>in</strong>g: 21<br />
― Appo<strong>in</strong>ted Actuary: Legal Requirements, Qualifications <strong>and</strong> External Review, Guidel<strong>in</strong>e E-15<br />
― M<strong>in</strong>imum Capital Test (MCT) for Federally Regulated <strong>Property</strong> <strong>and</strong> Casualty Insurance<br />
Companies, Guidel<strong>in</strong>e A<br />
― Internal Target Capital Ratio for Insurance Companies, Guidel<strong>in</strong>e A-4<br />
― Annual Disclosures (<strong>Property</strong> <strong>and</strong> Casualty Insurance Enterprises), Guidel<strong>in</strong>e D-1B<br />
― Account<strong>in</strong>g for Re<strong>in</strong>surance of Short-Term Insurance Contracts by <strong>Property</strong> <strong>and</strong> Casualty<br />
Insurance Enterprises, Guidel<strong>in</strong>e D-7<br />
― Earthquake Exposure Sound Practices, Guidel<strong>in</strong>e B-9 22<br />
― Stress Test<strong>in</strong>g, Guidel<strong>in</strong>e E-18<br />
― Sound Re<strong>in</strong>surance Practices <strong>and</strong> Procedures, (Corporate Governance) Guidel<strong>in</strong>e B-3<br />
It is important to emphasize the collaborative process with which OSFI operates. Guidel<strong>in</strong>es, such<br />
as those described below, are developed based on consultation with representatives from the<br />
<strong>in</strong>surance <strong>in</strong>dustry as well as <strong>in</strong>put from professional organizations such as the CIA, CICA, <strong>and</strong><br />
19<br />
“Table of OSFI Guidel<strong>in</strong>es,” http://www.osfi-bsif.gc.ca/osfi/<strong>in</strong>dex_e.aspx?DeailID=527 , accessed<br />
November 2010.<br />
20<br />
“Table of OSFI Guidel<strong>in</strong>es,” http://www.osfi-bsif.gc.ca/osfi/<strong>in</strong>dex_e.aspx?DeailID=527 , accessed<br />
November 2010.<br />
21<br />
It is important to recognize that there are other OSFI guidel<strong>in</strong>es that are applicable to P&C <strong>in</strong>surance<br />
companies <strong>and</strong> may have relevance to P&C actuaries, depend<strong>in</strong>g on their area of focus.<br />
22<br />
Note Guidel<strong>in</strong>e B-9 is currently <strong>in</strong> the process of review for reissue by OSFI.
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other key stakeholders. Guidel<strong>in</strong>es are typically released <strong>in</strong> draft format with a comment period<br />
for feedback from the <strong>in</strong>dustry.<br />
Appo<strong>in</strong>ted Actuary: Legal Requirements, Qualifications <strong>and</strong> External Review,<br />
Guidel<strong>in</strong>e E-15<br />
Guidel<strong>in</strong>e E-15, first issued <strong>in</strong> August 2003 <strong>and</strong> revised <strong>in</strong> November 2006, is applicable to<br />
actuaries work<strong>in</strong>g with life <strong>and</strong> P&C <strong>in</strong>surance companies. <strong>The</strong> “Introduction” to Guidel<strong>in</strong>e E-15<br />
states:<br />
This Guidel<strong>in</strong>e describes the role of the Appo<strong>in</strong>ted Actuary <strong>in</strong> federally regulated<br />
<strong>in</strong>surance companies <strong>and</strong> sets out some of OSFI’s expectations with respect to<br />
that role. <strong>The</strong> Guidel<strong>in</strong>e is divided <strong>in</strong>to three parts. <strong>The</strong> first part summarizes the<br />
major responsibilities of the actuary as described <strong>in</strong> the Insurance Companies Act<br />
(ICA) <strong>and</strong> the related Guidel<strong>in</strong>es <strong>and</strong> Memor<strong>and</strong>a published by OSFI. <strong>The</strong> second<br />
part deals with the actuary’s qualifications to carry out the Appo<strong>in</strong>ted Actuary’s<br />
role, <strong>and</strong> the third part sets out OSFI’s expectations with respect to external<br />
review of the Appo<strong>in</strong>ted Actuary’s work <strong>and</strong> reports.<br />
Other OSFI Guidel<strong>in</strong>es <strong>and</strong> Memor<strong>and</strong>a conta<strong>in</strong> additional <strong>in</strong>formation related to<br />
the responsibilities of the Appo<strong>in</strong>ted Actuary. Particularly important <strong>in</strong> this<br />
regard is the annual Memor<strong>and</strong>um to the Appo<strong>in</strong>ted Actuary. Separate versions<br />
are issued to actuaries of life <strong>in</strong>surance companies <strong>and</strong> to actuaries of property<br />
<strong>and</strong> casualty <strong>in</strong>surance companies. 23<br />
In “Section 1: Legal Requirements of the Appo<strong>in</strong>ted Actuary” of Guidel<strong>in</strong>e E-15, OSFI exp<strong>and</strong>s<br />
on the ICA requirements with respect to DCAT report<strong>in</strong>g. OSFI states:<br />
<strong>The</strong> Super<strong>in</strong>tendent expects that a report on the company’s expected future<br />
f<strong>in</strong>ancial condition will be prepared annually <strong>in</strong> compliance with the CIA<br />
st<strong>and</strong>ards. A DCAT report shall be based on the prior year end f<strong>in</strong>ancial position<br />
or a more recent position. If the DCAT Report is presented to the board of<br />
directors <strong>in</strong> the second half of the f<strong>in</strong>ancial year, then it shall <strong>in</strong>clude material<br />
changes <strong>in</strong> experience <strong>and</strong> <strong>in</strong> f<strong>in</strong>ancial position up to the period of 90 days before<br />
the date of the presentation. It is expected that the projection period for studies of<br />
P&C companies will be for at least three years. A copy of the report will be filed<br />
with OSFI with<strong>in</strong> thirty days of presentation to the company’s directors, but no<br />
later than the end of the calendar year. 24<br />
<strong>The</strong> qualification requirements for the AA are detailed <strong>in</strong> “Section 2: Qualifications Required” of<br />
Guidel<strong>in</strong>e E-15. As noted previously, the ICA requires that the actuary be an FCIA. Guidel<strong>in</strong>e E-<br />
15 states that <strong>in</strong> assess<strong>in</strong>g the suitability of an AA, the Super<strong>in</strong>tendent expects that the AA has<br />
each of the follow<strong>in</strong>g qualifications: 25<br />
23 Guidel<strong>in</strong>e E-15, November 2006, cover note.<br />
24 Guidel<strong>in</strong>e E-15, November 2006, page 4.<br />
25 Guidel<strong>in</strong>e E-15, November 2006, page 6.
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1. Has appropriate Canadian practical experience, which is def<strong>in</strong>ed as Work <strong>in</strong><br />
Canada for at least three of the last six years, of which at least one year was<br />
perform<strong>in</strong>g valuation of Canadian actuarial liabilities of an <strong>in</strong>surance company;<br />
2. Has experience with the CIA’s St<strong>and</strong>ards of Practice <strong>and</strong> relevant <strong>in</strong>surance<br />
legislation <strong>and</strong> regulation;<br />
3. Is up to date with respect to the CIA’s Cont<strong>in</strong>u<strong>in</strong>g Professional Development<br />
requirement;<br />
4. If the CIA <strong>in</strong> future requires an Appo<strong>in</strong>ted Actuary’s Certificate, is <strong>in</strong><br />
possession of an up-to-date Appo<strong>in</strong>ted Actuary Certificate from the CIA; <strong>and</strong><br />
5. Has not been the subject of an adverse f<strong>in</strong>d<strong>in</strong>g by a CIA Discipl<strong>in</strong>ary<br />
Tribunal. Where there has been such a f<strong>in</strong>d<strong>in</strong>g, the Super<strong>in</strong>tendent may<br />
nevertheless conclude that the AA is a suitable person if the circumstances of<br />
the case <strong>and</strong> other <strong>in</strong>formation support such a conclusion.<br />
<strong>The</strong> f<strong>in</strong>al section of Guidel<strong>in</strong>e E-15 is directed at external review of the work of the actuary. <strong>The</strong><br />
guidel<strong>in</strong>e states:<br />
OSFI believes that regular external review of certa<strong>in</strong> work by the AA, <strong>and</strong> the<br />
result<strong>in</strong>g provision to the AA of additional professional education, would be of<br />
significant benefit to a company’s stakeholders by contribut<strong>in</strong>g to the safety <strong>and</strong><br />
soundness of <strong>in</strong>surance companies, as described <strong>in</strong> the general objectives below.<br />
Consequently, OSFI expects that all federally regulated <strong>in</strong>surance companies will<br />
appo<strong>in</strong>t external reviewers to implement external review processes consistent<br />
with the OSFI criteria described below. <strong>The</strong> external review should be made <strong>in</strong><br />
accordance with accepted actuarial practice as specified <strong>in</strong> the CIA’s St<strong>and</strong>ards<br />
of Practice, <strong>in</strong> particular with Section 1640 of these st<strong>and</strong>ards <strong>and</strong> any related<br />
educational note. 26<br />
For P&C <strong>in</strong>surers, the external reviewer is expected to: 27<br />
1. Ascerta<strong>in</strong> that the work of the AA is with<strong>in</strong> the range of accepted actuarial<br />
practice, as established by the CIA, <strong>and</strong> is consistent with any objectives or<br />
requirements established by OSFI <strong>in</strong> Regulations, Guidel<strong>in</strong>es or the<br />
Memor<strong>and</strong>um to the AA (Note that the external review work is not <strong>in</strong>tended<br />
to duplicate the work of the external auditor.);<br />
2. Review the adequacy of procedures, systems <strong>and</strong> the work of others relied on<br />
by the AA, to the extent that these are not reviewed by the external auditor.<br />
This <strong>in</strong>cludes checks on data <strong>in</strong>tegrity <strong>and</strong> checks on procedures <strong>and</strong><br />
methodologies used to validate the calculations <strong>and</strong> results;<br />
3. Discuss with the AA the appropriateness of each of the assumptions made<br />
<strong>and</strong> the methods employed <strong>in</strong> the valuation of actuarial policy liabilities <strong>and</strong><br />
26 Guidel<strong>in</strong>e E-15, November 2006, page 7.<br />
27 Guidel<strong>in</strong>e E-15, November 2006, pages 7 <strong>and</strong> 8.
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ascerta<strong>in</strong> that the assumptions are at the appropriate po<strong>in</strong>t <strong>in</strong> the range of<br />
accepted actuarial practice, given the circumstances of the company;<br />
4. Determ<strong>in</strong>e whether the AA report accurately describes the assumptions <strong>and</strong><br />
methodology employed by the AA;<br />
5. Review <strong>and</strong> discuss with the AA the methodology, assumptions <strong>and</strong><br />
scenarios used for future f<strong>in</strong>ancial condition report<strong>in</strong>g as required by the<br />
Super<strong>in</strong>tendent, usually based on DCAT.<br />
M<strong>in</strong>imum Capital Test (MCT) for Federally Regulated <strong>Property</strong> <strong>and</strong> Casualty Insurance<br />
Companies, Guidel<strong>in</strong>e A (Draft)<br />
Draft Guidel<strong>in</strong>e A was released <strong>in</strong> May 2011. <strong>The</strong> Cover Note of Guidel<strong>in</strong>e A states:<br />
Subsection 515(1) of the Insurance Companies Act (ICA) requires Federally<br />
Regulated <strong>Property</strong> <strong>and</strong> Casualty Insurance Companies (P&C <strong>in</strong>surance<br />
companies) to ma<strong>in</strong>ta<strong>in</strong> adequate capital. Subsection 608(1) of the ICA requires<br />
foreign companies operat<strong>in</strong>g <strong>in</strong> Canada on a branch basis (foreign companies) to<br />
ma<strong>in</strong>ta<strong>in</strong> an adequate marg<strong>in</strong> of assets <strong>in</strong> Canada over liabilities <strong>in</strong> Canada. <strong>The</strong><br />
MCT Guidel<strong>in</strong>e is not made pursuant to subsections 515(2) <strong>and</strong> 608(3) of the Act.<br />
However, the m<strong>in</strong>imum <strong>and</strong> supervisory target capital st<strong>and</strong>ards set out <strong>in</strong> this<br />
guidel<strong>in</strong>e provide the framework with<strong>in</strong> which the Super<strong>in</strong>tendent assesses<br />
whether a P&C <strong>in</strong>surer ma<strong>in</strong>ta<strong>in</strong>s adequate capital pursuant to subsection 515(2)<br />
<strong>and</strong> whether a foreign company ma<strong>in</strong>ta<strong>in</strong>s an adequate marg<strong>in</strong> pursuant to<br />
subsection 608(1). Notwithst<strong>and</strong><strong>in</strong>g that a P&C <strong>in</strong>surer may meet these<br />
st<strong>and</strong>ards, the Super<strong>in</strong>tendent may direct the <strong>in</strong>surer to <strong>in</strong>crease its capital under<br />
subsection 515(3) or the foreign company to <strong>in</strong>crease the marg<strong>in</strong> of assets <strong>in</strong><br />
Canada over liabilities <strong>in</strong> Canada under subsection 608(4).<br />
This guidel<strong>in</strong>e outl<strong>in</strong>es the capital framework, us<strong>in</strong>g a risk-based formula for<br />
m<strong>in</strong>imum capital/marg<strong>in</strong> required, <strong>and</strong> def<strong>in</strong>es the capital/assets that are available<br />
to meet the m<strong>in</strong>imum st<strong>and</strong>ard. <strong>The</strong> MCT determ<strong>in</strong>es the m<strong>in</strong>imum<br />
capital/marg<strong>in</strong> required <strong>and</strong> not necessarily the optimum capital/marg<strong>in</strong> required.<br />
Foreign companies are rem<strong>in</strong>ded that the MCT is only a component of the<br />
required assets that must be ma<strong>in</strong>ta<strong>in</strong>ed <strong>in</strong> Canada by foreign <strong>in</strong>surers. Foreign<br />
companies must vest assets <strong>in</strong> accordance with the Adequacy of Assets <strong>in</strong> Canada<br />
test as prescribed <strong>in</strong> the Assets (Foreign Companies) Regulations.<br />
Actuaries rely on Guidel<strong>in</strong>e A as they assist P&C <strong>in</strong>surance companies prepare <strong>and</strong> analyze MCT<br />
calculations <strong>and</strong> <strong>in</strong> the DCAT process.<br />
Internet Target Capital Ratio for Insurance Companies, Guidel<strong>in</strong>e A-4<br />
Guidel<strong>in</strong>e A-4, which was released by OSFI <strong>in</strong> June 2011, is applicable to life <strong>and</strong> P&C domestic<br />
<strong>in</strong>surers as well as foreign <strong>in</strong>surance company branches. Guidel<strong>in</strong>e A-4 replaced an OSFI<br />
Advisory titled MCT <strong>and</strong> BAAT Supervisory Targets, dated December 2003. <strong>The</strong> guidel<strong>in</strong>e sets
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out OSFI’s expectations with respect to sett<strong>in</strong>g an <strong>in</strong>ternal capital ratio <strong>and</strong> capital management<br />
policies. 28<br />
Guidel<strong>in</strong>e A-4 is organized <strong>in</strong> five parts:<br />
I. <strong>The</strong> role of capital <strong>in</strong> OSFI’s risk assessment process<br />
II. Regulatory capital ratios<br />
III. Establish<strong>in</strong>g an <strong>in</strong>ternal target capital ratio<br />
IV. Capital management policy<br />
V. Corrective management actions<br />
Guidel<strong>in</strong>e A-4 also <strong>in</strong>cludes an Appendix titled “Determ<strong>in</strong><strong>in</strong>g an Internal Target Capital Ratio.”<br />
Guidel<strong>in</strong>e A-4 states that an <strong>in</strong>surer’s capital plann<strong>in</strong>g process should forward th<strong>in</strong>k<strong>in</strong>g <strong>and</strong><br />
<strong>in</strong>corporate rigorous stress test<strong>in</strong>g <strong>and</strong> scenarios that identify possible events or changes <strong>in</strong> market<br />
conditions that could adversely impact the <strong>in</strong>surer. 29<br />
Many actuaries are tak<strong>in</strong>g an active role <strong>in</strong> capital plann<strong>in</strong>g <strong>and</strong> management at Canadian P&C<br />
<strong>in</strong>surers, particularly <strong>in</strong> the development of <strong>in</strong>ternal models (also referred to as economic capital<br />
models). Furthermore, actuaries are also responsible for the DCAT process. While there is no<br />
specific reference to the role of actuaries <strong>in</strong> Guidel<strong>in</strong>e A-4, actuaries work<strong>in</strong>g <strong>in</strong> this area would<br />
be expected to be familiar with the requirements as set out <strong>in</strong> the guidel<strong>in</strong>e.<br />
Annual Disclosures (<strong>Property</strong> <strong>and</strong> Casualty Insurance Enterprises), Guidel<strong>in</strong>e D-1B<br />
Guidel<strong>in</strong>e D-1B was <strong>in</strong>itially released December 2001 <strong>and</strong> revised <strong>in</strong> October 2006, February<br />
2009, <strong>and</strong> most recently <strong>in</strong> July 2010. <strong>The</strong> guidel<strong>in</strong>e applies to domestically <strong>in</strong>corporated P&C<br />
<strong>in</strong>surers <strong>and</strong> Canadian branches of foreign P&C <strong>in</strong>surance companies. Guidel<strong>in</strong>e D-1B states:<br />
OSFI expects all P&C <strong>in</strong>surance enterprises to <strong>in</strong>clude required IFRSs<br />
disclosures <strong>and</strong> disclosures required by this Guidel<strong>in</strong>e <strong>in</strong> their OSFI annual return<br />
or supplementary management report appended to the annual return. 30<br />
As the focus of most IFRS disclosures is account<strong>in</strong>g policies, it is anticipated that the accountants<br />
prepar<strong>in</strong>g the <strong>in</strong>surer’s f<strong>in</strong>ancial statements will have primary responsibility for such disclosures.<br />
However, the actuary may want to provide <strong>in</strong>put or may be asked for <strong>in</strong>put. Thus, actuaries<br />
work<strong>in</strong>g <strong>in</strong> the area of f<strong>in</strong>ancial report<strong>in</strong>g would be expected to be familiar with the requirements<br />
set out <strong>in</strong> Guidel<strong>in</strong>e D-1B.<br />
Account<strong>in</strong>g for Re<strong>in</strong>surance of Short-Term Insurance Contracts by <strong>Property</strong> <strong>and</strong><br />
Casualty Insurance Enterprises, Guidel<strong>in</strong>e D-7<br />
<strong>The</strong> cover note of Guidel<strong>in</strong>e D-7, which was released February 1998, states:<br />
28 Guidel<strong>in</strong>e A-4, June 2011, cover note.<br />
29 Guidel<strong>in</strong>e A-4, Section III.<br />
30 Guidel<strong>in</strong>e D-1B, July 2010, cover note.
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<strong>The</strong> guidel<strong>in</strong>e outl<strong>in</strong>es the conditions that re<strong>in</strong>surance of short-term <strong>in</strong>surance<br />
contracts must meet <strong>in</strong> order to be accounted for as re<strong>in</strong>surance by federally<br />
regulated property <strong>and</strong> casualty <strong>in</strong>surance enterprises. It also sets out the<br />
account<strong>in</strong>g st<strong>and</strong>ards to be applied to these re<strong>in</strong>surance contracts.<br />
<strong>The</strong> guidel<strong>in</strong>e applies to all ced<strong>in</strong>g enterprises <strong>in</strong>clud<strong>in</strong>g assum<strong>in</strong>g enterprises<br />
that retrocede <strong>in</strong>surance risks. <strong>The</strong> guidel<strong>in</strong>e also applies to assum<strong>in</strong>g enterprises,<br />
that do not retrocede <strong>in</strong>surance risks, with respect to the guidance on<br />
<strong>in</strong>demnification aga<strong>in</strong>st loss or liability <strong>and</strong> the disclosure requirements, where<br />
relevant. 31<br />
Guidel<strong>in</strong>e D-7 is organized as follows:<br />
― Introduction to re<strong>in</strong>surance of short-term <strong>in</strong>surance contracts<br />
― Def<strong>in</strong>ition of <strong>in</strong>surance risk<br />
― Indemnification of a ced<strong>in</strong>g enterprise aga<strong>in</strong>st loss or liability<br />
― Report<strong>in</strong>g of assets, liabilities, revenues <strong>and</strong> costs<br />
― Recognition of revenues, costs, assets <strong>and</strong> liabilities<br />
― Disclosure<br />
― Appendix - Def<strong>in</strong>ition of terms<br />
Many P&C actuaries work for federally regulated re<strong>in</strong>surance companies or primary companies<br />
<strong>in</strong> the area of re<strong>in</strong>surance. Thus, it would be expected that these actuaries would be familiar with<br />
the regulatory requirements as set out <strong>in</strong> Guidel<strong>in</strong>e D-7.<br />
Earthquake Exposure Sound Practices, Guidel<strong>in</strong>e B-9<br />
Guidel<strong>in</strong>e B-9, issued <strong>in</strong> May 1998, sets out sound practices for the management <strong>and</strong><br />
measurement of earthquake exposures. S<strong>in</strong>ce the end of fiscal year 1998, federally regulated P&C<br />
<strong>in</strong>surers have been required to estimate their probable maximum loss (PML) aris<strong>in</strong>g from a major<br />
earthquake either through the use of computer-based model(s) or through the application of<br />
default loss estimate (DLE) st<strong>and</strong>ards. Many actuaries work <strong>in</strong> the area of catastrophe model<strong>in</strong>g<br />
both with<strong>in</strong> <strong>in</strong>surance companies <strong>and</strong> with service providers to <strong>in</strong>surers <strong>and</strong> assist companies <strong>in</strong><br />
comply<strong>in</strong>g with Guidel<strong>in</strong>e B-9.<br />
Guidel<strong>in</strong>e B-9 sets out:<br />
― Common parameters<br />
― Insurance coverage <strong>in</strong>formation<br />
― Risk characteristics<br />
― Loss estimation factors for consideration <strong>in</strong> estimat<strong>in</strong>g PMLs<br />
<strong>The</strong> purpose of this <strong>in</strong>formation is to enable OSFI to assess an <strong>in</strong>dividual <strong>in</strong>surer’s capacity <strong>and</strong><br />
f<strong>in</strong>ancial preparedness for a major earthquake.<br />
31 Guidel<strong>in</strong>e D-7, February 1998, cover note, bold terms <strong>in</strong>dicated def<strong>in</strong>ed terms.
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Stress Test<strong>in</strong>g, Guidel<strong>in</strong>e E-18<br />
Guidel<strong>in</strong>e E-18 was released December 2009 <strong>and</strong> is applicable to numerous types of f<strong>in</strong>ancial<br />
<strong>in</strong>stitutions, <strong>in</strong>clud<strong>in</strong>g P&C <strong>in</strong>surers. Guidel<strong>in</strong>e E-18 def<strong>in</strong>es stress test<strong>in</strong>g, which <strong>in</strong>cludes<br />
scenario test<strong>in</strong>g <strong>and</strong> sensitivity test<strong>in</strong>g, as “a risk management technique used to evaluate the<br />
potential effects on an <strong>in</strong>stitution’s f<strong>in</strong>ancial condition, of a set of specified changes <strong>in</strong> risk<br />
factors, correspond<strong>in</strong>g to exceptional but plausible events.” 32 This guidel<strong>in</strong>e identifies four<br />
purposes of stress test<strong>in</strong>g:<br />
― Risk identification <strong>and</strong> control<br />
― Provid<strong>in</strong>g a complementary risk perspective to other risk management tools<br />
― Support<strong>in</strong>g capital management<br />
― Improv<strong>in</strong>g liquidity management<br />
With respect to capital management, Guidel<strong>in</strong>e E-18 states:<br />
Stress test<strong>in</strong>g should form an <strong>in</strong>tegral part of <strong>in</strong>stitutions’ <strong>in</strong>ternal capital<br />
management where rigorous, forward-look<strong>in</strong>g stress test<strong>in</strong>g can identify severe<br />
events, <strong>in</strong>clud<strong>in</strong>g a series of compound<strong>in</strong>g events, or changes <strong>in</strong> market<br />
conditions that could adversely impact the <strong>in</strong>stitution. 33<br />
Guidel<strong>in</strong>e E-18 is organized <strong>in</strong> the follow<strong>in</strong>g sections:<br />
― Stress test<strong>in</strong>g def<strong>in</strong>ed<br />
― Purposes of stress test<strong>in</strong>g<br />
― <strong>Role</strong> of the board <strong>and</strong> senior management<br />
― General considerations for stress test<strong>in</strong>g programs<br />
― Methodology <strong>and</strong> scenario selection<br />
― Specific areas of focus<br />
― Risk mitigation<br />
― Securitization <strong>and</strong> warehous<strong>in</strong>g risks<br />
― Risks to reputation<br />
― Counterparty credit risk<br />
― Risk concentrations<br />
― Supervisory considerations<br />
― Glossary<br />
It is expected that actuaries will play a role <strong>in</strong> respond<strong>in</strong>g to the requirements of Guidel<strong>in</strong>e E-18,<br />
particularly through the use of DCAT models. Thus, actuaries would be expected to be familiar<br />
with the guidel<strong>in</strong>e.<br />
Sound Re<strong>in</strong>surance Practices <strong>and</strong> Procedures, (Corporate Governance) Guidel<strong>in</strong>e B-3<br />
In December 2010, OSFI released (Corporate Governance) Guidel<strong>in</strong>e B-3. <strong>The</strong> cover note to this<br />
guidel<strong>in</strong>e states:<br />
32 Guidel<strong>in</strong>e E-18, December 2009, page 2.<br />
33 Guidel<strong>in</strong>e E-18, December 2009, page 3.
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Re<strong>in</strong>surance is an important risk management tool available to an <strong>in</strong>surer. It can<br />
be used to reduce <strong>in</strong>surance risks <strong>and</strong> the volatility of f<strong>in</strong>ancial results, stabilize<br />
solvency, make more efficient use of capital, better withst<strong>and</strong> catastrophic<br />
events, <strong>in</strong>crease underwrit<strong>in</strong>g capacity, <strong>and</strong> to draw on re<strong>in</strong>surers’ expertise.<br />
However, re<strong>in</strong>surance exposes an <strong>in</strong>surer to other risks, <strong>in</strong>clud<strong>in</strong>g operational,<br />
legal, counterparty, <strong>and</strong> liquidity risks. <strong>The</strong> comb<strong>in</strong>ation of these risks can make<br />
re<strong>in</strong>surance complex <strong>and</strong> challeng<strong>in</strong>g to implement effectively. Inadequate<br />
re<strong>in</strong>surance risk management practices <strong>and</strong> procedures can materially affect an<br />
<strong>in</strong>surer’s f<strong>in</strong>ancial soundness <strong>and</strong> reputation, <strong>and</strong> can ultimately contribute to its<br />
failure.<br />
This Guidel<strong>in</strong>e sets out OSFI’s expectations for effective re<strong>in</strong>surance practices<br />
<strong>and</strong> procedures. <strong>The</strong>se practices <strong>and</strong> procedures should form an important part of<br />
an <strong>in</strong>surer’s overall re<strong>in</strong>surance risk management plan. It applies to all federally<br />
regulated <strong>in</strong>surers, <strong>in</strong>clud<strong>in</strong>g life <strong>in</strong>surers <strong>and</strong> property <strong>and</strong> casualty <strong>in</strong>surers,<br />
domestic <strong>in</strong>surance companies <strong>and</strong> foreign <strong>in</strong>surance companies <strong>in</strong> respect of<br />
their <strong>in</strong>surance bus<strong>in</strong>ess <strong>in</strong> Canada, registered re<strong>in</strong>surers, <strong>and</strong> fraternal benefit<br />
societies (collectively referred to as FRIs), that are party to re<strong>in</strong>surance cessions,<br />
retrocessions, <strong>and</strong>, where applicable, to assumption re<strong>in</strong>surance transactions. 34<br />
Similar to our comments about Guidel<strong>in</strong>e D-7, it is expected that the many P&C actuaries who<br />
work for federally regulated re<strong>in</strong>surance companies or primary companies <strong>in</strong> the area of<br />
re<strong>in</strong>surance would be familiar with the regulatory requirements as set out <strong>in</strong> Guidel<strong>in</strong>e B-3.<br />
Memor<strong>and</strong>um for the Appo<strong>in</strong>ted Actuary’s Report on <strong>Property</strong> <strong>and</strong> Casualty Insurance<br />
Bus<strong>in</strong>ess<br />
<strong>The</strong> Memor<strong>and</strong>um for the Appo<strong>in</strong>ted Actuary’s Report on <strong>Property</strong> <strong>and</strong> Casualty Insurance<br />
Bus<strong>in</strong>ess (OSFI Memo to the AA) provides critical guidance to P&C actuaries on an annual basis.<br />
Pursuant to Section 667 of the ICA, OSFI rout<strong>in</strong>ely updates this guidance, <strong>and</strong> typically releases it<br />
<strong>in</strong> the early fall of each year. <strong>The</strong> purpose of the OSFI Memo to the AA is to describe the<br />
guidel<strong>in</strong>es <strong>and</strong> requirements for AAs who prepare reports to be filed with the P&C-1 <strong>and</strong> P&C-2<br />
annual returns. <strong>The</strong> OSFI Memo to the AA applies to federally regulated P&C <strong>in</strong>surance<br />
companies <strong>and</strong> branches. 35<br />
<strong>The</strong> “Introduction” of the 2010 OSFI Memo to the AA states:<br />
This Memor<strong>and</strong>um describes the requirements of the Office of the<br />
Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions (OSFI) with respect to the Appo<strong>in</strong>ted<br />
Actuary’s Report (AAR), sets out the m<strong>in</strong>imum st<strong>and</strong>ards used <strong>in</strong> determ<strong>in</strong><strong>in</strong>g<br />
the acceptability of the AAR <strong>and</strong> provides guidance for actuaries prepar<strong>in</strong>g<br />
reports <strong>in</strong> matters relat<strong>in</strong>g to presentation, level of detail <strong>and</strong> nature of the<br />
discussions to be <strong>in</strong>cluded.<br />
…<br />
34 Guidel<strong>in</strong>e B-3, December 2010, cover note.<br />
35 Cover letter from Stuart Wason, Senior Director, Actuarial Division, Regulation Sector, to the OSFI<br />
Memo to the AA, October 26, 2010. Mr. Wason notes that for companies regulated by FSCO, the<br />
requirements are basically the same apart from differences due to differences <strong>in</strong> laws, regulations <strong>and</strong> fil<strong>in</strong>g<br />
<strong>in</strong>structions.
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Many <strong>in</strong>surers are required to file an AAR, as part of the Annual Return forms,<br />
with more than one regulator, federal or prov<strong>in</strong>cial, <strong>in</strong> Canada. It is the<br />
responsibility of the <strong>in</strong>surer to ensure that the AAR submitted as part of the<br />
Annual Return to each regulator complies with the requirements of that regulator.<br />
<strong>The</strong> term AAR refers to the detailed actuarial report submitted to a regulator.<br />
This <strong>in</strong>cludes the op<strong>in</strong>ion of the Appo<strong>in</strong>ted Actuary (Actuary) concern<strong>in</strong>g the<br />
fairness <strong>and</strong> adequacy of the policy liabilities <strong>in</strong>cluded <strong>in</strong> the <strong>in</strong>surer's f<strong>in</strong>ancial<br />
statements, a detailed commentary, data exhibits <strong>and</strong> calculations support<strong>in</strong>g that<br />
op<strong>in</strong>ion.<br />
An important purpose of the AAR is to give the regulator a comprehensive report<br />
document<strong>in</strong>g the work done by the Actuary to calculate the policy liabilities. <strong>The</strong><br />
AAR is a key component <strong>in</strong> OSFI’s review process of the company’s actuarial<br />
f<strong>in</strong>ancial position <strong>and</strong> profile.<br />
<strong>The</strong> AAR should not be considered to solely be a report from the company’s<br />
Actuary to the regulator’s actuaries. It is also <strong>in</strong>tended for company management<br />
<strong>and</strong> is read by regulators who are not actuaries but who are knowledgeable about<br />
<strong>in</strong>surance. It should be a generally underst<strong>and</strong>able presentation that can be used<br />
as a key component <strong>in</strong> the regulator’s monitor<strong>in</strong>g of the company’s f<strong>in</strong>ancial<br />
results. 36<br />
Recogniz<strong>in</strong>g the significant role of the 2010 OSFI Memo to the AA, we <strong>in</strong>clude a copy of the<br />
Table of Contents as Appendix B of this report.<br />
36 OSFI Memo to the AA, 2010, page 4.
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PART 6 – CURRENT CANADIAN REGULATORY<br />
REQUIREMENTS OF THE ACTUARY – PROVINCIAL<br />
REGULATION<br />
Generally, the role of prov<strong>in</strong>cial super<strong>in</strong>tendents of <strong>in</strong>surance across Canada is focused to a<br />
greater extent on issues such as market conduct, consumer protection, rate <strong>and</strong> form regulation<br />
rather than solvency monitor<strong>in</strong>g. 37 <strong>The</strong>re are significant differences between the prov<strong>in</strong>ces <strong>in</strong> the<br />
extent of <strong>in</strong>surance company regulation directed at solvency monitor<strong>in</strong>g. This is evident <strong>in</strong> our<br />
review of the prov<strong>in</strong>cial <strong>in</strong>surance acts, prov<strong>in</strong>cial regulations, <strong>and</strong> guidel<strong>in</strong>es, as well as our<br />
discussions with prov<strong>in</strong>cial regulators. Some prov<strong>in</strong>ces contract out exam<strong>in</strong>ations <strong>and</strong> solvency<br />
monitor<strong>in</strong>g to OSFI.<br />
In this part of the report, we first compare the <strong>in</strong>surance acts of the prov<strong>in</strong>ces <strong>and</strong> then describe<br />
current regulatory requirements aris<strong>in</strong>g from the offices of the prov<strong>in</strong>cial super<strong>in</strong>tendents of<br />
<strong>in</strong>surance.<br />
Prov<strong>in</strong>cial Insurance Legislation<br />
With respect to the actuary, the Insurance Acts of Alberta <strong>and</strong> Ontario are very similar to the<br />
federal ICA, both <strong>in</strong> structure <strong>and</strong> content. In Quebec, An Act Respect<strong>in</strong>g Insurance conta<strong>in</strong>s most<br />
of the same provisions regard<strong>in</strong>g the actuary as the federal ICA as does the F<strong>in</strong>ancial Institutions<br />
Act of British Columbia. 38<br />
In contrast, the only mention of actuary <strong>in</strong> the <strong>in</strong>surance acts of Nunavut, Yukon, <strong>and</strong> Northwest<br />
Territories is the def<strong>in</strong>ition: “Actuary means a Fellow of the Canadian Institute of Actuaries.” In<br />
Nova Scotia, there is no reference to actuary <strong>in</strong> the Insurance Act. In Newfoundl<strong>and</strong>, Section 84<br />
Auditor’s Report (c) states: “the auditor has exam<strong>in</strong>ed the reserve for unpaid claims <strong>and</strong> whether<br />
<strong>in</strong> his or her op<strong>in</strong>ion it is adequate.” <strong>The</strong>re is no mention <strong>in</strong> the Newfoundl<strong>and</strong> Insurance Act of<br />
the role of the actuary <strong>in</strong> such exam<strong>in</strong>ation or the necessity of a review of the premium liabilities.<br />
In New Brunswick, the only mention of the actuary is <strong>in</strong> relation to fraternal societies; <strong>and</strong> <strong>in</strong><br />
Pr<strong>in</strong>ce Edward Isl<strong>and</strong> only to fraternal societies <strong>and</strong> life <strong>in</strong>surers. <strong>The</strong>re are requirements set out<br />
<strong>in</strong> these <strong>in</strong>surance acts for a certified valuation <strong>and</strong> a statement as to the f<strong>in</strong>ancial condition of<br />
fraternal societies but not for P&C <strong>in</strong>surance companies.<br />
<strong>The</strong> Insurance Act of Manitoba has similar actuarial requirements as Pr<strong>in</strong>ce Edward Isl<strong>and</strong> <strong>and</strong><br />
New Brunswick for fraternal societies. However, unlike Pr<strong>in</strong>ce Edward Isl<strong>and</strong> <strong>and</strong> New<br />
Brunswick, the Insurance Act of Manitoba does <strong>in</strong>clude provisions for: 39<br />
37 J. Brian Reeve, Esq., Federation of Regulatory Counsel, Inc., Vol. 14, Edition 3 – Fall 2003,<br />
http://www.forc.org/public/journals/14, accessed November 2010.<br />
38 http://www.bclaws.ca/EPLibraries/bclaws_new/document/ID/freeside/30_325_90 <strong>and</strong><br />
http://www.canlii.org/en/qc/laws/stat/rsq-c-a-32/latest/rsq-c-a-32.html accessed November 2010.<br />
39 Part II, General Provision Applicable to Insurers <strong>in</strong> Manitoba Carry<strong>in</strong>g on Bus<strong>in</strong>ess, section titled<br />
“Supplementary Provisions Respect<strong>in</strong>g Corporate Governance of Insurers Incorporated <strong>in</strong> Manitoba,”<br />
http://web2.gov.mb.ca/laws/statutes/ccsm/i040e.php, accessed November 2010.
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― Appo<strong>in</strong>t<strong>in</strong>g the actuary<br />
― Fill<strong>in</strong>g a vacancy <strong>in</strong> actuary’s position<br />
― <strong>The</strong> Super<strong>in</strong>tendent’s right to exempt certa<strong>in</strong> <strong>in</strong>surers from the requirement of an actuary<br />
― Statement required when an actuary resigns or appo<strong>in</strong>tment is revoked<br />
― Duty of a replacement actuary <strong>and</strong> exceptions to such duty<br />
― Effects of non-compliance with provisions <strong>in</strong> the Insurance Act<br />
<strong>The</strong> only other mention of actuary <strong>in</strong> the Insurance Act of Manitoba is <strong>in</strong> Section 41.20(1) Duties<br />
of the audit committee. <strong>The</strong> Insurance Act sets out five requirements as to what must be reviewed<br />
by the audit committee <strong>and</strong> three requirements as to whom the audit committee must meet.<br />
Accord<strong>in</strong>g to item (g), the audit committee shall “meet with the <strong>in</strong>surer’s actuary to discuss the<br />
parts of the annual f<strong>in</strong>ancial statements <strong>and</strong> the annual return prepared by the actuary.”<br />
Similar to Manitoba, the requirements set out <strong>in</strong> the Saskatchewan Insurance Act are significantly<br />
less than those <strong>in</strong> the ICA or the <strong>in</strong>surance legislation of British Columbia, Alberta, Ontario, <strong>and</strong><br />
Quebec. In Saskatchewan, just as <strong>in</strong> many other <strong>in</strong>surance acts, actuary is formally def<strong>in</strong>ed to<br />
mean a FCIA. <strong>The</strong> role of the actuary is addressed <strong>in</strong> “RECORDS AND RETURNS, Annual<br />
return re prov<strong>in</strong>cial <strong>in</strong>surers, Section 86”:<br />
86(5) <strong>The</strong> annual return must be accompanied by the follow<strong>in</strong>g:<br />
…<br />
c) if required by the super<strong>in</strong>tendent, an actuary’s report that:<br />
i. is conducted <strong>and</strong> prepared <strong>in</strong> accordance with this Act <strong>and</strong> the<br />
regulations; <strong>and</strong><br />
ii. is satisfactory to the super<strong>in</strong>tendent.<br />
86.2(1) Subject to subsection (2):<br />
…<br />
c) every actuary’s report prepared pursuant to this Act or the regulations must<br />
be prepared <strong>in</strong> accordance with accepted actuarial practices described <strong>in</strong> the<br />
St<strong>and</strong>ards of Practice of the Canadian Institute of Actuaries, as amended<br />
from time to time.<br />
<strong>The</strong> other reference to actuary <strong>in</strong> the Saskatchewan Insurance Act appears <strong>in</strong> Section 467 which<br />
addresses the powers of the Lieutenant Governor <strong>in</strong> Council. Section 467(p.2) states: “respect<strong>in</strong>g<br />
any actuary’s report that a prov<strong>in</strong>cial <strong>in</strong>surer or reciprocal <strong>in</strong>surance exchange may be required to<br />
submit to the super<strong>in</strong>tendent, <strong>in</strong>clud<strong>in</strong>g the content, form <strong>and</strong> scope of the actuary’s report <strong>and</strong> the<br />
manner <strong>in</strong> which it is conducted.”<br />
Prov<strong>in</strong>cial Insurance Oversight of <strong>Solvency</strong> 40<br />
Alberta<br />
Accord<strong>in</strong>g to our discussion with a representative from Alberta F<strong>in</strong>ance <strong>and</strong> Enterprise, there are<br />
seven prov<strong>in</strong>cially regulated P&C companies <strong>in</strong> Alberta. <strong>The</strong>re is a requirement that all<br />
40 It appears that some prov<strong>in</strong>cial regulators did not count farm mutual organizations when respond<strong>in</strong>g to<br />
our question about the number of P&C <strong>in</strong>surance companies currently operat<strong>in</strong>g under prov<strong>in</strong>cial<br />
supervision. In this section, we report the number of companies based on the feedback we received from<br />
the prov<strong>in</strong>cial regulators. Thus, these numbers may not represent the total number of prov<strong>in</strong>cial P&C<br />
companies.
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prov<strong>in</strong>cially regulated <strong>in</strong>surers submit an actuary’s report support<strong>in</strong>g the policy liabilities with the<br />
annual return. <strong>The</strong> annual return follows the format of OSFI’s P&C-1 <strong>and</strong> <strong>in</strong>cludes the MCT<br />
schedule.<br />
<strong>The</strong> prov<strong>in</strong>cial regulator requires DCAT reports for most, though not all of the prov<strong>in</strong>cially<br />
regulated companies. Some exceptions are made for small companies where the cost is deemed to<br />
exceed the benefit of such an analysis. <strong>The</strong> requirement for a DCAT report was set out by a<br />
request from the regulator, as opposed to the development of a regulatory guidel<strong>in</strong>e or rul<strong>in</strong>g.<br />
DCAT reports were first required around two years ago; such reports are now required on an<br />
annual basis (unless a company has an exemption).<br />
British Columbia<br />
<strong>The</strong> F<strong>in</strong>ancial Institutions Commission (FICOM) <strong>in</strong> British Columbia has adopted many of the<br />
federal guidel<strong>in</strong>es directed at solvency. Recent Information Bullet<strong>in</strong>s from FICOM <strong>in</strong>clude:<br />
― Endorsed the report of the <strong>Property</strong> <strong>and</strong> Casualty MCT Advisory Committee (P&C MAC)<br />
titled Key Pr<strong>in</strong>ciples for the Future Direction of the Canadian Regulatory Capital<br />
Framework for <strong>Property</strong> & Casualty (P&C) Insurance (FICOM INS-10-004, April 2010)<br />
― Adopted Stress Test<strong>in</strong>g, Guidel<strong>in</strong>e E-18 which sets out expectations <strong>and</strong> consideration for<br />
stress test<strong>in</strong>g programs, <strong>and</strong> <strong>in</strong> particular, the DCAT for <strong>in</strong>surance companies (FICOM INS-<br />
10-002, March 2010)<br />
Fil<strong>in</strong>g Requirements for British Columbia Incorporated General Insurance Companies (FICOM<br />
INS-07-001), dated September 2007, lists annual, quarterly, <strong>and</strong> other statutory fil<strong>in</strong>g<br />
requirements of FICOM. Requirements <strong>in</strong>clude, but are not limited to:<br />
― P&C-1<br />
― Auditor’s report<br />
― Actuary’s report<br />
― Earthquake returns <strong>and</strong> report<br />
― DCAT report<br />
Manitoba<br />
Based on discussions with the prov<strong>in</strong>cial regulator, we underst<strong>and</strong> that there is only one<br />
prov<strong>in</strong>cially regulated <strong>in</strong>surer, exclud<strong>in</strong>g reciprocal <strong>in</strong>surance exchanges <strong>and</strong> Manitoba Public<br />
Insurance (the prov<strong>in</strong>cial automobile <strong>in</strong>surer), <strong>in</strong> Manitoba. <strong>The</strong>re is not a requirement for an<br />
annual DCAT report nor an actuary’s report or op<strong>in</strong>ion support<strong>in</strong>g the policy liabilities. <strong>The</strong><br />
company is required to report f<strong>in</strong>ancial results <strong>in</strong> accordance with the P&C-1 which conta<strong>in</strong>s<br />
MCT calculations.<br />
New Brunswick<br />
Based on <strong>in</strong>formation provided by the prov<strong>in</strong>cial regulator through email, there are five<br />
prov<strong>in</strong>cially regulated <strong>in</strong>surers <strong>in</strong> New Brunswick, four mutual <strong>in</strong>surers <strong>and</strong> one <strong>in</strong>corporated<br />
P&C <strong>in</strong>surer. Historically, the Super<strong>in</strong>tendent has determ<strong>in</strong>ed, on an annual basis, whether a
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DCAT report is required on a company by company basis, with the advice of the Exam<strong>in</strong>ations<br />
Branch. Similarly, the Super<strong>in</strong>tendent annually determ<strong>in</strong>es, on a company by company basis,<br />
whether an actuarial report <strong>and</strong> op<strong>in</strong>ion statement are required <strong>in</strong> support of the annual f<strong>in</strong>ancial<br />
statement. P&C <strong>in</strong>surers submit the P&C-1 which <strong>in</strong>cludes the report<strong>in</strong>g of the MCT results.<br />
Accord<strong>in</strong>g to David Weir, Deputy Super<strong>in</strong>tendent, Insurance Branch, Department of Justice, there<br />
is a requirement to follow MCT guidel<strong>in</strong>es set out by OSFI. F<strong>in</strong>ally, the requirement for external<br />
review of actuarial reports is also at the discretion of the Super<strong>in</strong>tendent.<br />
Nova Scotia<br />
We spoke with the prov<strong>in</strong>cial regulator of Nova Scotia regard<strong>in</strong>g the regulatory requirements for<br />
P&C <strong>in</strong>surers <strong>in</strong>corporated <strong>in</strong> Nova Scotia. Accord<strong>in</strong>g to the regulator, there are three prov<strong>in</strong>cial<br />
<strong>in</strong>surers, one of which is a reciprocal <strong>and</strong> one a life <strong>in</strong>surer. For the prov<strong>in</strong>cially regulated P&C<br />
<strong>in</strong>surer, there is a regulatory requirement, set out <strong>in</strong> a general request by the Super<strong>in</strong>tendent of<br />
Insurance, for an annual DCAT report <strong>and</strong> an actuarial report <strong>in</strong> support of the policy liabilities.<br />
<strong>The</strong> <strong>in</strong>surer must follow MCT report<strong>in</strong>g requirements that are similar to OSFI’s requirements.<br />
<strong>The</strong>re is no requirement for external review of the actuarial reports.<br />
Newfoundl<strong>and</strong> <strong>and</strong> Labrador<br />
<strong>The</strong>re are two prov<strong>in</strong>cially regulated P&C <strong>in</strong>surers <strong>in</strong> Newfoundl<strong>and</strong>. <strong>The</strong>re is no requirement for<br />
a DCAT report for these companies. <strong>The</strong>re is, however, a requirement for an actuarial report <strong>and</strong><br />
op<strong>in</strong>ion statement which supports the policy liabilities as reported <strong>in</strong> the annual return. <strong>The</strong><br />
annual return follows the format of OSFI’s P&C-1 <strong>and</strong> <strong>in</strong>cludes the MCT schedules.<br />
Ontario<br />
<strong>The</strong> F<strong>in</strong>ancial Services Commission of Ontario (FSCO) has adopted much of the guidance related<br />
to solvency set out by OSFI. FSCO’s 2009 Memor<strong>and</strong>um for Actuarial Report on <strong>Property</strong> <strong>and</strong><br />
Casualty Insurance Bus<strong>in</strong>ess states that with the exception of mutual <strong>in</strong>surance corporations that<br />
are members of the Fire Mutuals Guarantee Fund, all P&C <strong>in</strong>surers <strong>and</strong> reciprocals are required<br />
to submit an actuarial valuation report with their annual statements. “Ontario requirements are<br />
mostly the same as those issued by OSFI, except differences <strong>in</strong> the review procedure <strong>and</strong> fil<strong>in</strong>g<br />
directions.” 41 Based on discussions with FSCO, we underst<strong>and</strong> that one difference between the<br />
prov<strong>in</strong>cial <strong>and</strong> federal <strong>in</strong>structions to the AA <strong>in</strong> 2010 relates to the number of years required for<br />
the summary of loss development. FSCO will cont<strong>in</strong>ue to require a five year loss development<br />
schedule <strong>and</strong> OSFI moved to a ten year schedule effective with 2010 year-end AA reports.<br />
FSCO has also adopted OSFI’s M<strong>in</strong>imum Capital Test Guidel<strong>in</strong>e for <strong>Property</strong> <strong>and</strong> Casualty<br />
Insurance Companies as well as the annual return <strong>and</strong> <strong>in</strong>structions (<strong>in</strong>clud<strong>in</strong>g the OSFI Memo to<br />
the AA). 42 Accord<strong>in</strong>g to “Fil<strong>in</strong>g Information for Insurers Licensed <strong>in</strong> Ontario,” FSCO requires<br />
P&C companies <strong>in</strong>corporated <strong>in</strong> Ontario to file:<br />
― P&C-1<br />
― Auditor’s report<br />
41 2009 Memor<strong>and</strong>um for Actuarial Report on <strong>Property</strong> <strong>and</strong> Casualty Insurance Bus<strong>in</strong>ess, December 30,<br />
2009, cover memor<strong>and</strong>um from Dennis Chan, Chief Actuary (Insurance).<br />
42 http://www.fsco.gov.on.ca/english/forms/annualreturns/default.asp, accessed November 2010.
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― Actuary’s report<br />
― Data diskette<br />
― DCAT report<br />
Quebec<br />
<strong>The</strong> Autorité des marchés f<strong>in</strong>anciers (AMF) has a long st<strong>and</strong><strong>in</strong>g history of active supervision,<br />
directed at both solvency <strong>and</strong> market conduct, for both prov<strong>in</strong>cially regulated <strong>in</strong>surers <strong>and</strong><br />
<strong>in</strong>surers licensed to conduct bus<strong>in</strong>ess <strong>in</strong> Quebec. <strong>The</strong> “Introduction” to F<strong>in</strong>ancial Institutions<br />
Supervisory Framework, Super<strong>in</strong>tendence of <strong>Solvency</strong> (Supervisory Framework) summarizes<br />
AMF’s role <strong>in</strong> solvency monitor<strong>in</strong>g: 43<br />
As provided for under its constitut<strong>in</strong>g Act, part of the AMF's mission is to:<br />
"ensure that the f<strong>in</strong>ancial <strong>in</strong>stitutions <strong>and</strong> other regulated entities of the f<strong>in</strong>ancial<br />
sector comply with the solvency st<strong>and</strong>ards applicable to them as well as with the<br />
obligations imposed on them by law with a view to protect<strong>in</strong>g the <strong>in</strong>terests of<br />
consumers of f<strong>in</strong>ancial products <strong>and</strong> services, <strong>and</strong> take any measure provided by<br />
law for those purposes."<br />
AMF <strong>Solvency</strong>'s m<strong>and</strong>ate is to:<br />
― ensure that f<strong>in</strong>ancial <strong>in</strong>stitutions hold all the necessary authorizations to<br />
operate <strong>in</strong> Québec;<br />
― oversee f<strong>in</strong>ancial <strong>in</strong>stitutions to ensure that they meet the various legal,<br />
regulatory <strong>and</strong> normative requirements, <strong>in</strong> particular <strong>in</strong> terms of solvency <strong>and</strong><br />
sound <strong>and</strong> prudent management practices; <strong>and</strong>,<br />
― develop normative tools, such as guidel<strong>in</strong>es or st<strong>and</strong>ards, <strong>in</strong>tended for<br />
f<strong>in</strong>ancial <strong>in</strong>stitutions <strong>in</strong> the performance of their activities.<br />
<strong>The</strong> Supervisory Framework, released March 2009, is applicable to P&C <strong>in</strong>surers <strong>in</strong>corporated <strong>in</strong><br />
Quebec. In April 2010, AMF published Actuarial <strong>and</strong> F<strong>in</strong>ancial Supervision of Non-Quebec<br />
Chartered Insurers, which sets out the solvency framework for <strong>in</strong>stitutions do<strong>in</strong>g bus<strong>in</strong>ess <strong>in</strong><br />
Quebec but <strong>in</strong>corporated under either federal or another prov<strong>in</strong>ce’s law.<br />
Prov<strong>in</strong>cial guidel<strong>in</strong>es are directed at many of the same issues addressed by OSFI guidel<strong>in</strong>es.<br />
<strong>The</strong>se <strong>in</strong>clude but are not limited to:<br />
― Guidel<strong>in</strong>e on Capital Adequacy Requirements <strong>Property</strong> <strong>and</strong> Casualty Insurance, revised June<br />
2008, which addresses MCT for Canadian P&C <strong>in</strong>surance companies<br />
― Guidel<strong>in</strong>e Assets Adequacy Requirements <strong>Property</strong> <strong>and</strong> Casualty Insurance, October 2004,<br />
which addresses BAAT for foreign P&C <strong>in</strong>surers<br />
43 Supervisory Framework, March 2009, page 3.
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― Guidel<strong>in</strong>e Sound Management <strong>and</strong> Measurements of Earthquake Exposure, October 1998,<br />
which “sets forth sound practices for the management <strong>and</strong> measurement of earthquake<br />
exposure.” 44<br />
― Re<strong>in</strong>surance Risk Management Guidel<strong>in</strong>e, April 2010<br />
<strong>The</strong> Guidel<strong>in</strong>e on Capital Adequacy Requirements <strong>Property</strong> <strong>and</strong> Casualty Insurance states that<br />
most <strong>in</strong>surers can meet their <strong>in</strong>ternal target capital levels<br />
… by draw<strong>in</strong>g on dynamic capital adequacy test<strong>in</strong>g (DCAT) scenarios <strong>and</strong><br />
<strong>in</strong>clud<strong>in</strong>g unfavourable scenarios with higher probability of realization. As well,<br />
they would need to consider the variable nature of their MCT result <strong>and</strong> the<br />
impacts of any lag with their target level. F<strong>in</strong>ally, <strong>in</strong>surers must consider <strong>in</strong>dustry<br />
results <strong>in</strong> similar classes of <strong>in</strong>surance <strong>in</strong> which they operate. 45<br />
Saskatchewan<br />
<strong>The</strong>re are eleven prov<strong>in</strong>cially regulated Saskatchewan <strong>in</strong>surance companies <strong>and</strong> an additional ten<br />
reciprocal <strong>in</strong>surance exchanges (only two of which were set up <strong>in</strong> the prov<strong>in</strong>ce). Neither the<br />
DCAT nor the actuary’s report on policy liabilities is required by the Insurance Act or regulatory<br />
guidel<strong>in</strong>es. However, the Super<strong>in</strong>tendent of Insurance can (<strong>and</strong> does) require some companies to<br />
complete these reports on an annual basis. Prov<strong>in</strong>cially regulated <strong>in</strong>surers <strong>in</strong> Saskatchewan are<br />
required to comply with MCT guidel<strong>in</strong>es that are similar to OSFI. <strong>The</strong>re is no requirement for<br />
external review of actuary’s reports.<br />
Summary<br />
F<strong>in</strong>ancial report<strong>in</strong>g requirements <strong>in</strong> Canada are largely harmonized for prov<strong>in</strong>cially <strong>and</strong> federally<br />
regulated <strong>in</strong>surance companies, with all <strong>in</strong>surers us<strong>in</strong>g the same P&C-1 report<strong>in</strong>g framework. As<br />
a result, prov<strong>in</strong>cial supervisory authorities have access to st<strong>and</strong>ardized capital (m<strong>in</strong>imum capital<br />
test, MCT) <strong>and</strong> other f<strong>in</strong>ancial metrics. In addition, based on our discussions with<br />
Super<strong>in</strong>tendents, many prov<strong>in</strong>cial supervisors seek to ma<strong>in</strong>ta<strong>in</strong> actuarial or solvency practices <strong>in</strong><br />
their jurisdictions. A number of prov<strong>in</strong>ces, however, do not have the regulatory or statutory<br />
support necessary to ensure that those st<strong>and</strong>ards are consistently met on an annual basis. For<br />
example, while prov<strong>in</strong>cial supervisors have access to MCT metrics, some prov<strong>in</strong>ces have<br />
statutory capital requirements that differ from the MCT. Similarly, 30 years after Hammond<br />
spoke of the need for more casualty actuaries engaged <strong>in</strong> regulatory roles, many prov<strong>in</strong>ces do not<br />
have <strong>in</strong>ternal actuarial resources or resources to facilitate the Super<strong>in</strong>tendent’s supervision of<br />
prov<strong>in</strong>cial <strong>in</strong>surers.<br />
44 http://www.lautorite.qc.ca/files/pdf/reglementation/lignes-directrices-assurance/1998oct-ld-tremblement-<br />
terre-en.pdf, accessed November 2010<br />
45 Guidel<strong>in</strong>e on Capital Adequacy Requirements <strong>Property</strong> <strong>and</strong> Casualty Insurance, page 2.
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PART 7 – THE CANADIAN INSTITUTE OF ACTUARIES<br />
History of the CIA<br />
On March 18, 1965, the CIA was established by an Act of the federal parliament which set out its<br />
purpose as follows: 46<br />
<strong>The</strong> purpose <strong>and</strong> objects of the Institute shall be the follow<strong>in</strong>g:<br />
― to advance <strong>and</strong> develop actuarial science,<br />
― to promote the application of actuarial science to human affairs, <strong>and</strong><br />
― to establish, promote <strong>and</strong> ma<strong>in</strong>ta<strong>in</strong> high st<strong>and</strong>ards of competence <strong>and</strong> conduct<br />
with<strong>in</strong> the actuarial profession.<br />
<strong>The</strong> CIA serves as the national organization of the actuarial profession <strong>in</strong> Canada. Actuaries are<br />
not licensed by any of the prov<strong>in</strong>ces or the federal government. Instead the Fellowship<br />
designation of the CIA is referenced by federal <strong>and</strong> prov<strong>in</strong>cial <strong>in</strong>surance acts as well as federal<br />
<strong>and</strong> prov<strong>in</strong>cial regulatory guidance. 47<br />
Even prior to the formation of the CIA, the statements of life <strong>and</strong> health <strong>in</strong>surance companies<br />
required an actuary’s signature. After the establishment of the CIA, most Canadian jurisdictions<br />
<strong>in</strong>troduced the requirement that the actuary must be an FCIA. In 1992, similar requirements<br />
became effective for federally registered P&C <strong>in</strong>surance companies. Around the same time,<br />
Ontario <strong>and</strong> Quebec adopted similar requirements for prov<strong>in</strong>cially registered P&C <strong>in</strong>surers. <strong>The</strong><br />
CIA <strong>in</strong>itiated a special program to exp<strong>and</strong> the number of P&C actuaries <strong>in</strong> anticipation of these<br />
requirements.<br />
<strong>The</strong> key responsibilities of the CIA are: 48<br />
― Accredit actuaries <strong>in</strong> Canada<br />
― Promote the advancement of actuarial science through research<br />
― Promote cont<strong>in</strong>u<strong>in</strong>g professional development activities <strong>and</strong> ensure that actuarial services<br />
provided by its members meet extremely high professional st<strong>and</strong>ards<br />
From its <strong>in</strong>ception <strong>in</strong> 1965 through 2006, the CIA was responsible for develop<strong>in</strong>g <strong>and</strong> enforc<strong>in</strong>g<br />
actuarial st<strong>and</strong>ards of practice for the profession. In 2005, follow<strong>in</strong>g the actions of actuarial<br />
organizations around the world, the CIA set up a Task Force <strong>in</strong> Corporate Governance. After a<br />
two year review <strong>and</strong> consultation process, the CIA adopted a new governance structure on<br />
January 1, 2007.<br />
Actuarial st<strong>and</strong>ards of practice are currently developed by the <strong>in</strong>dependent Actuarial St<strong>and</strong>ards<br />
Board (ASB). <strong>The</strong> mission of the ASB is to develop, establish, <strong>and</strong> ma<strong>in</strong>ta<strong>in</strong> st<strong>and</strong>ards of practice<br />
govern<strong>in</strong>g the actuarial profession <strong>in</strong> Canada. Its objectives are: 49<br />
46<br />
http://www.actuaries.ca/about/history_e.cfm, accessed November 2010.<br />
47<br />
<strong>The</strong> common def<strong>in</strong>ition of actuary <strong>in</strong> the ICA as well as many prov<strong>in</strong>cial <strong>in</strong>surance acts is a “Fellow of<br />
the Canadian Institute of Actuaries” (FCIA).<br />
48<br />
http://www.actuaries.ca/ASB/relationships_e.cfm, accessed November 2010.
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― To provide cont<strong>in</strong>uous review of St<strong>and</strong>ards of Practice <strong>and</strong> determ<strong>in</strong>e<br />
whether they are <strong>in</strong> need of alteration, expansion or elim<strong>in</strong>ation;<br />
― To direct <strong>and</strong> manage the development of St<strong>and</strong>ards of Practice <strong>in</strong> all areas of<br />
actuarial practice;<br />
― To adopt St<strong>and</strong>ards of Practice <strong>in</strong> all areas of actuarial practice, with<strong>in</strong> its sole<br />
discretion <strong>and</strong> pursuant to such procedures as it deems appropriate; <strong>and</strong><br />
― To ensure the adequate communication of St<strong>and</strong>ards of Practice to Members,<br />
Associates <strong>and</strong> Affiliates of the Canadian Institute of Actuaries (CIA), public<br />
regulatory <strong>and</strong> judicial bodies, governments, other professions <strong>and</strong> other<br />
members of the public.<br />
<strong>The</strong> ASB is accountable to the Actuarial St<strong>and</strong>ards Oversight Council (ASOC), which was also<br />
established by the CIA on January 1, 2007. <strong>The</strong> purpose of the ASOC is to serve the public<br />
<strong>in</strong>terest through oversight <strong>and</strong> <strong>in</strong>put <strong>in</strong>to the activities of the ASB. <strong>The</strong> ASOC is comprised of<br />
experienced professionals <strong>and</strong> bus<strong>in</strong>ess people with backgrounds <strong>in</strong> the f<strong>in</strong>ancial sector.<br />
<strong>The</strong> Practice Council of the CIA is responsible for direct<strong>in</strong>g <strong>and</strong> manag<strong>in</strong>g the development of all<br />
practice-related material other than st<strong>and</strong>ards of practice. <strong>The</strong> Practice Council oversees all<br />
educational notes, research papers, task force reports, <strong>and</strong> other similar publications for all areas<br />
of practice of the CIA.<br />
As <strong>in</strong>dicated previously, the CIA works closely with Canadian regulators, most notably at the<br />
federal level. Many prov<strong>in</strong>cial <strong>and</strong> federal <strong>in</strong>surance acts require that certa<strong>in</strong> documents be<br />
approved by FCIAs. “When legislation changes, often the profession’s St<strong>and</strong>ards of Practice need<br />
to change as well. <strong>The</strong> regulators often depend on the actuarial profession to adapt its st<strong>and</strong>ards,<br />
<strong>in</strong> that the regulations themselves are not specific on actuarial matters. Canada’s actuaries are also<br />
<strong>in</strong>volved <strong>in</strong> advocat<strong>in</strong>g legislative change to governments <strong>in</strong> response to demographic or bus<strong>in</strong>ess<br />
necessities.” 50<br />
<strong>The</strong> most substantive developments <strong>in</strong> actuarial st<strong>and</strong>ards of practice for P&C actuaries occurred<br />
<strong>in</strong> the 1990s <strong>and</strong> early 2000s. While actuarial st<strong>and</strong>ards of practice cont<strong>in</strong>ue to evolve, much of<br />
the work of the past decade, exclud<strong>in</strong>g the requirements for actuarial external review, can be<br />
categorized as ref<strong>in</strong>ements <strong>and</strong> extension of exist<strong>in</strong>g practices.<br />
<strong>The</strong> Crawford Report<br />
One cannot report on the history of the CIA, without <strong>in</strong>clud<strong>in</strong>g the work <strong>and</strong> f<strong>in</strong>d<strong>in</strong>gs of the<br />
Crawford Task Force. In July 1988, the CIA created a task force, later known as the Crawford<br />
Task Force. 51 This task force, which did not conduct any <strong>in</strong>dependent research, met five times<br />
<strong>and</strong> considered the work of other CIA committees <strong>and</strong> the reports of the Task Force on<br />
Strengthen<strong>in</strong>g the Profession <strong>and</strong> the Future of the Actuary. <strong>The</strong>ir report titled Report of the Task<br />
49 http://www.actuaries.ca/ASB/terms_e.cfm, accessed November 2010.<br />
50 http://www.actuaries.ca/ASB/relationships_e.cfm, accessed November 2010.<br />
51 Members <strong>in</strong>cluded: Robert M. Astley, Allan U. Brender, Christopher D. Chapman, Marc Fernet, Michael<br />
B. McGu<strong>in</strong>ness, Robert T. Smith, Hugh G. White, Brian Wood<strong>in</strong>g, J. Dickson Crawford, Chairman.
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Force on the Future of the Canadian Institute of Actuaries <strong>in</strong> the North American Context<br />
(December 1989) is referred to as <strong>The</strong> Crawford Report.<br />
<strong>The</strong>re were three recommendations that are particularly relevant to PACICC’s question about the<br />
evolution of the actuarial role <strong>and</strong> its effect on the solvency of P&C <strong>in</strong>surers: 52<br />
― Recommendation 1: That the CIA adopt a new statement of purpose which<br />
gives precedence to service <strong>in</strong> the public <strong>in</strong>terest over self-<strong>in</strong>terest of the<br />
member.<br />
― Recommendation 9: That the CIA <strong>in</strong>crease its support of research <strong>and</strong><br />
development for property <strong>and</strong> casualty <strong>in</strong>surance, develop st<strong>and</strong>ards of<br />
practice for this area, <strong>and</strong> <strong>in</strong>crease its contribution to basic <strong>and</strong> cont<strong>in</strong>u<strong>in</strong>g<br />
education for its students <strong>and</strong> members on these topics.<br />
― Recommendation 12: That the CIA resolve to improve <strong>and</strong> exp<strong>and</strong> its<br />
contribution to the development <strong>and</strong> direction of public policy issues <strong>in</strong><br />
Canada through:<br />
1. A more effective monitor<strong>in</strong>g of emerg<strong>in</strong>g issues<br />
2. A more vigorous participation <strong>in</strong> public policy debates on a timely basis<br />
3. Cont<strong>in</strong>ued <strong>and</strong> strengthened contact with government regulators <strong>and</strong><br />
policy makers.<br />
<strong>The</strong> CIA Lead<strong>in</strong>g to the 1980s<br />
Initially, the CIA was an association of actuaries primarily focused on the exchange of<br />
professional <strong>in</strong>formation <strong>and</strong> practical techniques. “<strong>The</strong> vision of the creation of the CIA <strong>in</strong> 1965<br />
moved the profession toward the acceptance of responsibility for the qualification <strong>and</strong> practice of<br />
actuaries <strong>in</strong> order to ensure that the public receives quality work performed by well-tra<strong>in</strong>ed <strong>and</strong><br />
skilled professionals.” 53<br />
<strong>The</strong> Crawford Report addressed the issue of the development of <strong>and</strong> compliance with<br />
professional st<strong>and</strong>ards. In the late 1980s, a great deal of attention <strong>and</strong> effort was devoted to the<br />
“amplification of the code of conduct through the preparation <strong>and</strong> endorsement of new st<strong>and</strong>ards<br />
of practice.” 54 <strong>The</strong> report identifies three sources of pressure for these changes: 55<br />
― Members with certificate sign<strong>in</strong>g responsibilities sought a clearer foundation of<br />
literature on acceptable practice.<br />
― <strong>The</strong> CICA reviewed the CIA body of st<strong>and</strong>ards for the purpose of produc<strong>in</strong>g a<br />
better basis for the auditor’s reliance on the actuary where their work overlapped.<br />
52 <strong>The</strong> Crawford Report, December 1989.<br />
53 <strong>The</strong> Crawford Report, December 1989, Section 2A.<br />
54 <strong>The</strong> Crawford Report, December 1989, Section 2C.<br />
55 <strong>The</strong> Crawford Report, December 1989, Section 2C.
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― Cont<strong>in</strong>u<strong>in</strong>g education supports the root<strong>in</strong>g of the new st<strong>and</strong>ard firmly <strong>in</strong> the<br />
regular practice of members, <strong>and</strong> compliance reviews <strong>and</strong> discipl<strong>in</strong>ary procedures<br />
deal with deviations from official st<strong>and</strong>ards.<br />
Recommendation 1 – A Change <strong>in</strong> the CIA’s Mission<br />
In our meet<strong>in</strong>g with Mr. Wiel<strong>and</strong>, he <strong>in</strong>dicated that one of the most pivotal contributions of <strong>The</strong><br />
Crawford Report was a change <strong>in</strong> the mission of the CIA. This is addressed <strong>in</strong> Section 3 of the<br />
report: 56<br />
<strong>The</strong> essential strength of the profession is that it serves both the public <strong>and</strong> its<br />
own members. This balance has been vital to the success of the CIA. Us<strong>in</strong>g the<br />
phrases of the Task Force on Strengthen<strong>in</strong>g the Profession, the CIA is both a<br />
public <strong>in</strong>terface body <strong>and</strong> a member service organization.<br />
However, there are times <strong>and</strong> issues when these two responsibilities can be <strong>in</strong><br />
conflict. We believe that it is timely to restate our mission <strong>and</strong> give unequivocal<br />
precedence to the public <strong>in</strong>terface role. <strong>The</strong> Honourable Willard Estey challenged<br />
the profession to dedicate itself to this goal <strong>in</strong> his keynote address at the<br />
Centennial Celebration of the Actuarial Profession <strong>in</strong> June 1989.<br />
“A commitment by each <strong>and</strong> every member (of the profession) towards<br />
the community <strong>in</strong>terest, humanitarian <strong>and</strong> other altruistic goals<br />
overrid<strong>in</strong>g the immediate economic necessities of life of the profession<br />
<strong>in</strong> his daily work.”<br />
In his conclusion he returned to this theme:<br />
“That the highest <strong>and</strong> always the paramount consideration <strong>in</strong> a<br />
profession is the public <strong>in</strong>terest component over <strong>and</strong> above self<strong>in</strong>terest.”<br />
<strong>The</strong> first Guid<strong>in</strong>g Pr<strong>in</strong>ciple of the CIA, as set out <strong>in</strong> March 1993, states that <strong>in</strong> carry<strong>in</strong>g on its<br />
activities <strong>and</strong> programs, the CIA holds the duty of the profession to the public above the needs of<br />
the profession <strong>and</strong> its members. <strong>The</strong> complete Guid<strong>in</strong>g Pr<strong>in</strong>ciples are <strong>in</strong>cluded as Appendix A to<br />
this report.<br />
Recommendation 9 – Address<strong>in</strong>g the Need for P&C Actuaries<br />
At the time of <strong>The</strong> Crawford Report, P&C actuaries represented 3% of the total membership of<br />
the CIA. 57 <strong>The</strong> Crawford Report states:<br />
<strong>The</strong> CIA’s most press<strong>in</strong>g problem <strong>in</strong> exp<strong>and</strong><strong>in</strong>g our scope is to f<strong>in</strong>d an adequate<br />
supply of casualty actuaries. <strong>The</strong>re is a wide variety of professional issues which<br />
have been tackled on the life side but which have not been looked at on the<br />
casualty side as yet due to manpower problems (e.g., solvency st<strong>and</strong>ards). This is<br />
56 <strong>The</strong> Crawford Report, December 1989, Section 3.<br />
57 <strong>The</strong> Crawford Report, Appendix I, Section D.
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crucial for the Institute s<strong>in</strong>ce our proposed word<strong>in</strong>g with respect to the Valuation<br />
Actuary <strong>in</strong> the forthcom<strong>in</strong>g legislation does not dist<strong>in</strong>guish between life <strong>and</strong><br />
property <strong>and</strong> casualty companies. Our first priority should be to <strong>in</strong>crease the<br />
number of casualty actuaries <strong>in</strong> Canada, <strong>in</strong>crease the development of professional<br />
techniques <strong>and</strong> st<strong>and</strong>ards for these members, <strong>and</strong> try to encourage the P&C<br />
<strong>in</strong>dustry to use actuaries to an extent approach<strong>in</strong>g their use <strong>in</strong> life companies.<br />
In call<strong>in</strong>g for a broader role for property <strong>and</strong> casualty actuaries, the CIA must be<br />
prepared to support those of its members who carry out this role. This support<br />
extends from recruit<strong>in</strong>g <strong>and</strong> manpower requirements for casualty actuaries, to the<br />
development of new techniques <strong>in</strong> such areas as valuation <strong>and</strong> solvency for<br />
property <strong>and</strong> casualty <strong>in</strong>surance, the establishment of appropriate st<strong>and</strong>ards of<br />
practice, <strong>and</strong> the education of students <strong>and</strong> members. 58<br />
Recommendation 12 – Focus on Current Issues <strong>in</strong> Government Relations<br />
In the late 1980s the CIA was exp<strong>and</strong><strong>in</strong>g its contacts with regulators <strong>and</strong> provid<strong>in</strong>g <strong>in</strong>put to their<br />
activities <strong>and</strong> the development of new legislation. Specifically, <strong>The</strong> Crawford Report states that<br />
“exp<strong>and</strong>ed role of the valuation actuary may soon be recognized <strong>in</strong> legislation.” 59 It was noted<br />
that actuarial certification of P&C reserves was planned <strong>in</strong> some prov<strong>in</strong>ces as well as federally<br />
<strong>and</strong> that more prov<strong>in</strong>ces were consider<strong>in</strong>g such requirements. At the time, Ontario was <strong>in</strong> the<br />
midst of a two-year overhaul of its <strong>in</strong>surance legislation <strong>and</strong> Pr<strong>in</strong>ce Edward Isl<strong>and</strong> was expected<br />
to conduct a similar process. “All federal <strong>and</strong> prov<strong>in</strong>cial regulators are <strong>in</strong>terested <strong>in</strong> the<br />
development of better early warn<strong>in</strong>g <strong>in</strong>dicators for solvency problems. <strong>Solvency</strong> st<strong>and</strong>ards be<strong>in</strong>g<br />
developed by the Institute are of particular <strong>in</strong>terest.” 60<br />
It is <strong>in</strong>terest<strong>in</strong>g to note that some prov<strong>in</strong>ces (such as Alberta, British Columbia, Ontario, <strong>and</strong><br />
Quebec) have developed <strong>in</strong>surance legislation with many of the same provisions of the ICA.<br />
However, the rema<strong>in</strong><strong>in</strong>g prov<strong>in</strong>ces depend to a greater extent on directives from the<br />
super<strong>in</strong>tendents rather than the prov<strong>in</strong>cial <strong>in</strong>surance acts.<br />
Evolution of CIA St<strong>and</strong>ards of Practice<br />
Recommendations for <strong>Property</strong>-Casualty Insurance Company F<strong>in</strong>ancial Report<strong>in</strong>g<br />
Among the first st<strong>and</strong>ards directed at P&C actuaries was Recommendations for <strong>Property</strong>-<br />
Casualty Insurance Company F<strong>in</strong>ancial Report<strong>in</strong>g (Recommendations), which was approved by<br />
CIA Council <strong>in</strong> November 1989 <strong>and</strong> effective January 1990. <strong>The</strong> Recommendations were set out<br />
<strong>in</strong> seven parts:<br />
1. Introduction<br />
2. Data<br />
3. Considerations for claims liabilities<br />
58 <strong>The</strong> Crawford Report, December 1989, Section 6.<br />
59 <strong>The</strong> Crawford Report, December 1989, Section 8.<br />
60 <strong>The</strong> Crawford Report, December 1989, Section 8.
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4. Considerations for policy liabilities 61<br />
5. Methods <strong>and</strong> assumptions<br />
6. <strong>The</strong> Actuary’s report <strong>in</strong> published f<strong>in</strong>ancial statements<br />
7. <strong>The</strong> report by the Valuation Actuary <strong>in</strong> the government statement<br />
While the Recommendations were officially repealed by the CIA on January 1, 2003, many of the<br />
subject areas are addressed <strong>in</strong> subsequent st<strong>and</strong>ards of practice. For example, Section 1530 of the<br />
current st<strong>and</strong>ards of practice addresses data:<br />
If the actuary reports without reservation with respect to data, then the data<br />
should be sufficient <strong>and</strong> reliable for the work. If sufficient <strong>and</strong> reliable data are<br />
unobta<strong>in</strong>able but the defect <strong>in</strong> them does not negate the usefulness of the result,<br />
then the actuary should report a usual op<strong>in</strong>ion with reservation <strong>in</strong> respect of data.<br />
If defect <strong>in</strong> the obta<strong>in</strong>able data precludes a useful result, then the actuary should<br />
so report or make no report. 62<br />
And Section 1710 of the current st<strong>and</strong>ards of practice addresses assumptions:<br />
<strong>The</strong> needed assumptions for a calculation consist of model assumptions, data<br />
assumptions, <strong>and</strong> other assumptions. <strong>The</strong>re is a model assumption for each of the<br />
matters that the actuary’s model takes <strong>in</strong>to account. Those matters should be<br />
sufficiently comprehensive for the model reasonably to represent reality. Data<br />
assumptions are the assumptions, if any, needed to relieve <strong>in</strong>sufficiency or<br />
unreliability <strong>in</strong> the obta<strong>in</strong>able data. <strong>The</strong> other assumptions are the assumptions<br />
about the legal, economic, demographic, <strong>and</strong> social environment on which the<br />
model <strong>and</strong> data assumptions depend. 63<br />
Part 3 of the Recommendations is based <strong>in</strong> large part on the Statement of Pr<strong>in</strong>ciples Regard<strong>in</strong>g<br />
<strong>Property</strong> <strong>and</strong> Casualty Loss <strong>and</strong> Loss Adjustment Expense Reserves (Statement of Pr<strong>in</strong>ciples),<br />
which was adopted by the Board of Directors of the Casualty Actuarial Society (CAS), <strong>in</strong> May<br />
1988. <strong>The</strong> considerations cited <strong>in</strong> the Recommendations <strong>in</strong>clude: 64<br />
― Homogeneity<br />
― Credibility<br />
― Emergence patterns<br />
― Settlement patterns<br />
― Development patterns<br />
― Frequency <strong>and</strong> severity<br />
― Reopened claims potential<br />
61 “Policy liabilities” was a def<strong>in</strong>ed term <strong>in</strong> Recommendations <strong>and</strong> represented “all the anticipated net costs<br />
to discharge the <strong>in</strong>surance company’s obligations with respect to its <strong>in</strong>surance policies <strong>and</strong> re<strong>in</strong>surance<br />
contracts except its claim liabilities.” <strong>The</strong> def<strong>in</strong>ition of policy liabilities was changed <strong>in</strong> subsequent<br />
st<strong>and</strong>ards to <strong>in</strong>clude claim liabilities; <strong>and</strong> the term “premium liabilities” was adopted to represent the<br />
portion of policy liabilities which are not claim liabilities.<br />
62 Effective December 1, 2002, Revised February 5, 2009,<br />
http://www.actuaries.ca/members/publications/2009/SOP_e_General_1000_April09.pdf, accessed<br />
November 2010.<br />
63 Effective December 1, 2002, Revised February 5, 2009,<br />
http://www.actuaries.ca/members/publications/2009/SOP_e_General_1000_April09.pdf, accessed<br />
November 2010.<br />
64 http://www.actuaries.ca/members/publications/1990/9005e.pdf, accessed November 2010.
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― Aggregate limits<br />
― Collateral sources<br />
― Re<strong>in</strong>surance cession<br />
― Pools <strong>and</strong> associations<br />
― Operational changes<br />
― Changes <strong>in</strong> loss distribution<br />
― External <strong>in</strong>fluences<br />
― Claim reserv<strong>in</strong>g techniques<br />
Even though the Recommendations were repealed by the CIA, these considerations are still<br />
applicable to Canadian fully qualified actuaries work<strong>in</strong>g <strong>in</strong> P&C <strong>in</strong>surance. Some of the<br />
considerations were explicitly <strong>in</strong>corporated <strong>in</strong>to subsequent st<strong>and</strong>ards of practice of the CIA.<br />
Furthermore, P&C actuaries typically atta<strong>in</strong> Fellowship <strong>in</strong> the CAS <strong>in</strong> order to achieve their FCIA<br />
designation. Thus, as members of the CAS, P&C actuaries are required to consider the Statement<br />
of Pr<strong>in</strong>ciples <strong>in</strong> conduct<strong>in</strong>g analyses of policy liabilities.<br />
Two significant requirements for P&C actuaries as set out <strong>in</strong> the Recommendations were the<br />
establishment of policy <strong>and</strong> claim liabilities on a present value basis <strong>and</strong> the provision for adverse<br />
deviation. In address<strong>in</strong>g the requirements for the present value of policy (i.e., premium) <strong>and</strong> claim<br />
liabilities, the Recommendations states:<br />
It is generally accepted actuarial practice to value liabilities as the present value<br />
of the payments which those liabilities represent. Pend<strong>in</strong>g better def<strong>in</strong>ition by the<br />
profession of an appropriate provision for adverse deviations, regulation <strong>in</strong> some<br />
jurisdictions requires the liabilities <strong>in</strong> government f<strong>in</strong>ancial statements to be the<br />
sum, rather than the present value, of those payments. Where there is such a<br />
requirement, the recommendation <strong>in</strong> this section to establish a present value<br />
provision does not apply to the valuation of liabilities <strong>in</strong> government f<strong>in</strong>ancial<br />
statements <strong>and</strong> because it is desirable that liabilities be reported the same way <strong>in</strong><br />
both government <strong>and</strong> published f<strong>in</strong>ancial statements, it likewise does not apply to<br />
the valuation of liabilities <strong>in</strong> published f<strong>in</strong>ancial statements. 65<br />
And when discuss<strong>in</strong>g provision for adverse deviation, the Recommendations note:<br />
It is not possible to determ<strong>in</strong>e total liabilities with complete confidence. In<br />
evaluat<strong>in</strong>g liabilities, consideration should be given to the <strong>in</strong>surer’s obligations to<br />
policyholders <strong>and</strong> claimants, as well as the <strong>in</strong>herent variability of conditions<br />
affect<strong>in</strong>g future claim payments.<br />
Such consideration will result <strong>in</strong> the estimation of liabilities on a conservative<br />
basis. <strong>The</strong> degree of conservatism is a matter of actuarial judgment <strong>and</strong> depends<br />
upon the follow<strong>in</strong>g factors:<br />
1. <strong>The</strong> member’s confidence <strong>in</strong> the expected development pattern;<br />
2. <strong>The</strong> quality <strong>and</strong> depth of historical data form<strong>in</strong>g the basis on which the<br />
reserve is evaluated;<br />
3. <strong>The</strong> statistical fluctuations affect<strong>in</strong>g ultimate claim frequency <strong>and</strong> severity;<br />
4. <strong>The</strong> <strong>in</strong>flation rate (implicitly or explicitly) assumed <strong>in</strong> the valuation; <strong>and</strong><br />
65 http://www.actuaries.ca/members/publications/1990/9005e.pdf, Section 5.04, accessed November 2010.
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5. Conservatism of the <strong>in</strong>terest rate used to determ<strong>in</strong>e the present value of<br />
policy <strong>and</strong> claim liabilities.<br />
<strong>The</strong> member should not <strong>in</strong>clude as a part of the provision for adverse deviation,<br />
any provision for cont<strong>in</strong>gent events which have a remote probability of<br />
occurrence.<br />
If policies <strong>and</strong> claims liabilities are not stated on a present value basis, then the<br />
member should consider the impact of discount<strong>in</strong>g for <strong>in</strong>terest <strong>in</strong> the computation<br />
of the Provision for Adverse Deviation. 66<br />
<strong>The</strong> f<strong>in</strong>al two sections of the Recommendations, which addressed the actuary’s role <strong>in</strong> published<br />
f<strong>in</strong>ancial statements <strong>and</strong> report<strong>in</strong>g of the valuation actuary, were replaced with updated st<strong>and</strong>ards<br />
of practice. Report<strong>in</strong>g is now addressed <strong>in</strong> Section 1800 of the st<strong>and</strong>ards of practice.<br />
<strong>The</strong> Recommendations were exp<strong>and</strong>ed upon by Council <strong>in</strong> November 1997 with a new<br />
application section that became effective December 1, 1997. <strong>The</strong> revision to the<br />
Recommendations provided st<strong>and</strong>ards of practice for entities that are essentially the same as P&C<br />
<strong>in</strong>surance companies, <strong>in</strong> terms of the necessary valuation techniques, if not <strong>in</strong> terms of regulatory<br />
environment. Accord<strong>in</strong>g to new Section 1.09 Application, “these st<strong>and</strong>ards of practice apply to an<br />
actuary’s work <strong>in</strong> the valuation of the policy (<strong>in</strong>clud<strong>in</strong>g claim) liabilities of a property-casualty<br />
<strong>in</strong>surance company unless the Workers’ Compensation St<strong>and</strong>ards apply.” 67<br />
As of December 1997, the def<strong>in</strong>ition of P&C <strong>in</strong>surance company <strong>in</strong>cludes, but is not necessarily<br />
limited to: 68<br />
a. A federally or prov<strong>in</strong>cially regulated Canadian property-casualty <strong>in</strong>surance<br />
company,<br />
b. A federally or prov<strong>in</strong>cially regulated branch of a foreign property-casualty<br />
<strong>in</strong>surance company,<br />
c. A federally or prov<strong>in</strong>cially regulated property <strong>and</strong> casualty reciprocal<br />
<strong>in</strong>surance exchange,<br />
d. A federal or prov<strong>in</strong>cial crown corporation or agency act<strong>in</strong>g <strong>in</strong> a capacity<br />
similar to a property-casualty <strong>in</strong>surance company,<br />
e. A company provid<strong>in</strong>g extended warranties, or<br />
f. A professional <strong>in</strong>demnity fund or self-fund<strong>in</strong>g mechanism <strong>in</strong>tended to<br />
provide protection aga<strong>in</strong>st risks which could be <strong>in</strong>sured by a propertycasualty<br />
<strong>in</strong>surance company.<br />
Appo<strong>in</strong>ted/Valuation Actuary Compliance Questionnaire for <strong>Property</strong>-Casualty<br />
Insurance Company F<strong>in</strong>ancial Report<strong>in</strong>g <strong>in</strong> Canada<br />
From 1991 until 2001, AAs were required to file a compulsory questionnaire with the Institute on<br />
an annual basis. <strong>The</strong> purpose of the questionnaire was to respond to the CIA’s commitment to<br />
monitor<strong>in</strong>g members’ compliance with the st<strong>and</strong>ards of practice. <strong>The</strong> Compliance Questionnaire<br />
was designed to cover the statutory valuation process of P&C <strong>in</strong>surers report<strong>in</strong>g <strong>in</strong> Canada <strong>and</strong><br />
66 http://www.actuaries.ca/members/publications/1990/9005e.pdf, Section 5.05, accessed November 2010.<br />
67 http://www.actuaries.ca/members/publications/1997/9762e.pdf, accessed November 2010.<br />
68 http://www.actuaries.ca/members/publications/1997/9762e.pdf, accessed November 2010.
PACICC – <strong>The</strong> P&C Actuary’s <strong>Role</strong> <strong>in</strong> <strong>Solvency</strong> Monitor<strong>in</strong>g Page 34<br />
filed with applicable regulatory authorities. Individual responses were reviewed by members of<br />
the <strong>Property</strong>-Casualty Subcommittee of the Committee on Compliance <strong>and</strong> if deemed necessary,<br />
the Committee on Review or the Committee on Discipl<strong>in</strong>e.<br />
St<strong>and</strong>ards of Practice for the Appo<strong>in</strong>ted Actuary of an Insurance Company<br />
<strong>The</strong> exposure draft of the St<strong>and</strong>ards of Practice for the Appo<strong>in</strong>ted Actuary of an Insurance<br />
Company (SOP for the AA) was released by the CIA to membership <strong>in</strong> September 1991.<br />
Follow<strong>in</strong>g m<strong>in</strong>or modifications by the Committee to Develop the <strong>Role</strong> of the Valuation Actuary<br />
<strong>and</strong> the Committee on St<strong>and</strong>ards of Practice, the f<strong>in</strong>al st<strong>and</strong>ard was approved by Council at the<br />
June 1992 meet<strong>in</strong>g, <strong>and</strong> the st<strong>and</strong>ard became effective June 15, 1992.<br />
This st<strong>and</strong>ard applied to AAs of all life <strong>and</strong> P&C <strong>in</strong>surance companies operat<strong>in</strong>g <strong>in</strong> Canada,<br />
domestic or foreign, <strong>in</strong> respect of the total bus<strong>in</strong>ess of domestic companies <strong>and</strong> the Canadian<br />
bus<strong>in</strong>ess of foreign companies. Transitional requirements were set out for AAs of prov<strong>in</strong>cially<br />
regulated companies <strong>and</strong> P&C <strong>in</strong>surance companies with respect to DCAT requirements.<br />
<strong>The</strong> key requirements of the SOP for the AA, which are consistent with the requirements as set<br />
out <strong>in</strong> the ICA, <strong>in</strong>cluded: 69<br />
― An actuary should accept <strong>and</strong> reta<strong>in</strong> an appo<strong>in</strong>tment as AA only if the actuary has the<br />
necessary qualifications, experience, <strong>and</strong> knowledge. (Section 2.1)<br />
― Prior to accept<strong>in</strong>g an appo<strong>in</strong>tment as AA, an actuary should consult with the previous<br />
AA to determ<strong>in</strong>e whether there are any professional reasons not to accept the<br />
appo<strong>in</strong>tment. (Section 2.2)<br />
― Prior to accept<strong>in</strong>g an appo<strong>in</strong>tment as AA, an actuary should ensure that the board of<br />
directors, or such other body that makes the appo<strong>in</strong>tment, underst<strong>and</strong>s the duties of<br />
the AA. (Section 2.3)<br />
― Prior to accept<strong>in</strong>g an appo<strong>in</strong>tment as AA, an actuary should ensure that the board of<br />
directors, or such other body that makes the appo<strong>in</strong>tment, agrees to the requirements<br />
needed to fulfill the responsibilities of the AA, <strong>in</strong>clud<strong>in</strong>g but not limited to, timely<br />
access to all necessary <strong>and</strong> relevant management <strong>in</strong>formation, adequate resources <strong>and</strong><br />
an appropriate venue for present<strong>in</strong>g the AA’s annual report. (Section 2.4)<br />
― If the preced<strong>in</strong>g requirements cannot be satisfied, an actuary should not accept<br />
appo<strong>in</strong>tment as AA. If, after appo<strong>in</strong>tment, conditions change such that the<br />
requirements are no longer satisfied <strong>and</strong>, <strong>in</strong> the actuary’s op<strong>in</strong>ion, will not be satisfied<br />
<strong>in</strong> a timely fashion, the actuary should resign the appo<strong>in</strong>tment. (Section 2.5)<br />
― An AA should arrange access to the records, accounts <strong>and</strong> documents necessary to<br />
provide an underst<strong>and</strong><strong>in</strong>g of the company’s obligations <strong>and</strong> the resources expected to<br />
be available to meet these obligations. (Section 3.1)<br />
69 All bullet po<strong>in</strong>ts are taken from the italics requirements as set out <strong>in</strong> Sections 2 through 6 of the SOP for<br />
the AA, http://www.actuaries.ca/members/publications/1992/9240e.pdf, accessed November 2010.
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― An AA should obta<strong>in</strong> <strong>in</strong>formation <strong>in</strong> respect of the company’s exist<strong>in</strong>g obligations<br />
<strong>and</strong> resources, <strong>and</strong> for those expected <strong>in</strong> a future period, such period be<strong>in</strong>g dependent<br />
upon the company’s bus<strong>in</strong>ess plans <strong>and</strong> the time over which the company can react to<br />
any situation requir<strong>in</strong>g corrective action. (Section 3.2)<br />
― An AA should identify the types of transactions or conditions which may have a<br />
material adverse effect on the f<strong>in</strong>ancial condition of the company <strong>and</strong> establish a<br />
monitor<strong>in</strong>g process so that the AA is aware of these transactions or conditions on a<br />
timely basis. (Section 4.1)<br />
― If, <strong>in</strong> the op<strong>in</strong>ion of an AA, a transaction or condition causes a material adverse effect<br />
on the company’s f<strong>in</strong>ancial condition <strong>and</strong> requires rectification, the AA should<br />
expeditiously report the situation <strong>in</strong> writ<strong>in</strong>g to the chief executive officer <strong>and</strong> the<br />
chief f<strong>in</strong>ancial officer, or their appo<strong>in</strong>ted designates, if actuary of a domestic<br />
company, <strong>and</strong> to the chief agent, if actuary of a foreign company, <strong>and</strong> provide a<br />
deadl<strong>in</strong>e for corrective action. (Section 4.2)<br />
― Where an AA makes a report under Section 4.2, the report shall be sent also to the<br />
board of directors. (Section 4.3)<br />
― If suitable action is not taken by the date set, the AA should immediately notify the<br />
regulatory authority <strong>in</strong> writ<strong>in</strong>g. <strong>The</strong> notice should conta<strong>in</strong> a summary of the concerns,<br />
a copy of the report, a description of events that have occurred s<strong>in</strong>ce the writ<strong>in</strong>g of<br />
the report <strong>and</strong> any additional relevant <strong>in</strong>formation. (Section 4.4)<br />
― At least once each year, an AA should make a report to the board of directors, or its<br />
designate, <strong>in</strong> regard to the current f<strong>in</strong>ancial position <strong>and</strong> expected future f<strong>in</strong>ancial<br />
condition of the company. (Section 5.1)<br />
― An AA should take all reasonable steps to be cont<strong>in</strong>ually apprised of what a current<br />
report <strong>in</strong> accordance with Section 5.1 would <strong>in</strong>dicate. If such a report would <strong>in</strong>dicate<br />
the need for corrective action to ensure a satisfactory f<strong>in</strong>ancial condition, then a<br />
report should be made <strong>in</strong> accordance with Section 4. (Section 5.2)<br />
― When comply<strong>in</strong>g with the statutory responsibility to value 70 the actuarial <strong>and</strong> other<br />
policy liabilities <strong>and</strong> such other matters as specified (<strong>in</strong> accordance with the<br />
requirements of regulatory authorities), an AA should make such valuations <strong>in</strong><br />
accordance with the Recommendations. (Section 6.1)<br />
― When comply<strong>in</strong>g with the statutory responsibility to make reports for the annual<br />
statement <strong>and</strong> published f<strong>in</strong>ancial statements, an AA should make such reports as<br />
satisfy the applicable st<strong>and</strong>ards of practice of the Institute (particularly as set out <strong>in</strong><br />
<strong>The</strong> Appo<strong>in</strong>ted Actuary’s Report for Insurance Company Published F<strong>in</strong>ancial<br />
Statements). (Section 6.2)<br />
70 “Value is taken <strong>in</strong> its broad term, mean<strong>in</strong>g to calculate (or review <strong>and</strong> validate a calculation made by<br />
others) <strong>in</strong> accordance with the st<strong>and</strong>ards of practice of the Canadian Institute of Actuaries <strong>in</strong> respect of data<br />
accuracy, sett<strong>in</strong>g assumptions, appropriateness of method, completeness, <strong>and</strong> materiality.” (Source: SOP of<br />
the AA)
PACICC – <strong>The</strong> P&C Actuary’s <strong>Role</strong> <strong>in</strong> <strong>Solvency</strong> Monitor<strong>in</strong>g Page 36<br />
― An AA should give the AA’s report for <strong>in</strong>clusion <strong>in</strong> the published f<strong>in</strong>ancial<br />
statements only if such statements or accompany<strong>in</strong>g documents conta<strong>in</strong> a description<br />
of the respective roles of the AA <strong>and</strong> auditor. (Section 6.3)<br />
Transitional requirements were set out <strong>in</strong> this st<strong>and</strong>ard which recognized that the role of the AA<br />
was not yet recognized <strong>in</strong> the legislation or regulations of all prov<strong>in</strong>ces. Thus, an AA was not<br />
required to comply with Sections 2.3, 2.4, 4.3, or 4.4. 71 It was also noted that the AA need not<br />
have access to <strong>in</strong>formation under Section 3.1 that is the prerogative of the board, though<br />
documentation <strong>and</strong> report<strong>in</strong>g to management, <strong>and</strong> possibly resignation, was required if the AA<br />
was unable to obta<strong>in</strong> access to adequate <strong>in</strong>formation.<br />
It was also noted that the AA of a P&C company need not comply with the sections related to<br />
DCAT (Sections 5.1 <strong>and</strong> 5.2) until st<strong>and</strong>ards of practice were implemented, <strong>and</strong> <strong>in</strong> no event prior<br />
to calendar year 1993.<br />
SOP of the AA was repealed effective January 1, 2003 when the Consolidated St<strong>and</strong>ards of<br />
Practice – Practice Specific St<strong>and</strong>ards for Insurers were adopted by the CIA.<br />
<strong>The</strong> Appo<strong>in</strong>ted Actuary’s Report for Insurance Company F<strong>in</strong>ancial Statements <strong>and</strong><br />
<strong>The</strong> Appo<strong>in</strong>ted Actuary’s Report for Insurance Company Published F<strong>in</strong>ancial Statements<br />
<strong>The</strong> next st<strong>and</strong>ard applicable to actuaries work<strong>in</strong>g <strong>in</strong> the area of P&C <strong>in</strong>surance company<br />
f<strong>in</strong>ancial report<strong>in</strong>g was <strong>The</strong> Appo<strong>in</strong>ted Actuary’s Report for Insurance Company F<strong>in</strong>ancial<br />
Statements (AA Report 1), approved November 1992 <strong>and</strong> effective January 1 1992 (so that they<br />
applied to 1992 f<strong>in</strong>ancial statements). <strong>The</strong> exception with respect to effective date was the report<br />
on f<strong>in</strong>ancial condition which was deferred to the 1995 f<strong>in</strong>ancial statements <strong>and</strong> was not allowed<br />
earlier.<br />
AA Report 1 applied to an actuary’s report <strong>in</strong> the published f<strong>in</strong>ancial statements of an <strong>in</strong>surance<br />
company if those f<strong>in</strong>ancial statements were <strong>in</strong> accordance with generally accepted account<strong>in</strong>g<br />
pr<strong>in</strong>ciples (GAAP). <strong>The</strong> st<strong>and</strong>ards of practice described:<br />
― <strong>The</strong> contents of the actuary’s report<br />
― <strong>The</strong> situations where a st<strong>and</strong>ard report is appropriate<br />
― <strong>The</strong> st<strong>and</strong>ard report<br />
― <strong>The</strong> draft<strong>in</strong>g of a report with reservation for unusual situations<br />
Effective January 1, 1992, AA Report 1 required that the actuary’s report describe the valuation<br />
<strong>and</strong> presentation of the policy liabilities for the <strong>in</strong>surance company’s balance sheet <strong>and</strong> <strong>in</strong>come<br />
statement. Effective January 1, 1995, the st<strong>and</strong>ard was exp<strong>and</strong>ed to require that the actuary’s<br />
report also describe the exam<strong>in</strong>ation of the <strong>in</strong>surance company’s f<strong>in</strong>ancial condition.<br />
AA Report 1 specified what policy liabilities <strong>in</strong> a P&C <strong>in</strong>surance company would typically consist<br />
of:<br />
― Claim liabilities – those <strong>in</strong> connection with claims which have been <strong>in</strong>curred but not<br />
yet paid at the balance sheet date<br />
71 If not comply<strong>in</strong>g with Section 4.4, an AA was required to fully document any concerns <strong>and</strong> events that<br />
have occurred s<strong>in</strong>ce writ<strong>in</strong>g the report required <strong>in</strong> Section 4.2.
PACICC – <strong>The</strong> P&C Actuary’s <strong>Role</strong> <strong>in</strong> <strong>Solvency</strong> Monitor<strong>in</strong>g Page 37<br />
― Other policy liabilities – those <strong>in</strong> connection with unearned premiums <strong>and</strong> with<br />
retrospective rat<strong>in</strong>g, such as adjustable premium <strong>and</strong> adjustable commission policies<br />
AA Report 1 noted that a valuation of unearned premiums also <strong>in</strong>cluded a determ<strong>in</strong>ation of<br />
deferred policy acquisition expenses if they are accounted for as an asset <strong>in</strong> the balance sheet.<br />
Discount<strong>in</strong>g of claim liabilities was an important issue at the time of AA Report 1. On January 13,<br />
1993, the CIA published a memor<strong>and</strong>um to all members of the CIA practic<strong>in</strong>g <strong>in</strong> the P&C area<br />
with a correction to AA Report 1 that addressed discount<strong>in</strong>g. This memor<strong>and</strong>um noted that it is<br />
accepted actuarial practice to discount premium <strong>and</strong> claim liabilities. <strong>The</strong> memor<strong>and</strong>um then<br />
reported on the current GAAP <strong>and</strong> regulatory positions on discount<strong>in</strong>g: 72<br />
Currently, GAAP permits either discounted or undiscounted claim liabilities. <strong>The</strong><br />
CICA Account<strong>in</strong>g Guidel<strong>in</strong>e for F<strong>in</strong>ancial Report<strong>in</strong>g by <strong>Property</strong> <strong>and</strong> Casualty<br />
Insurance Companies (April 1986) states <strong>in</strong> paragraph 12,<br />
Claim Provisions<br />
Consensus has not been reached as to propriety of specifically<br />
recogniz<strong>in</strong>g the time value of money <strong>in</strong> establish<strong>in</strong>g claim provisions.<br />
(...) When the time value of money is specifically taken <strong>in</strong>to<br />
consideration, disclosure should be made as to the l<strong>in</strong>es of bus<strong>in</strong>ess<br />
affected, the carry<strong>in</strong>g amounts of liabilities that are presented at present<br />
value <strong>and</strong> the rates of <strong>in</strong>terest that have been used to discount such<br />
liabilities.<br />
Currently, many regulators do not accept discounted premium or claim liabilities.<br />
OSFI states, <strong>in</strong> Section 4.2 of the 1992 Instructions for Actuarial Reports for<br />
<strong>Property</strong> <strong>and</strong> Casualty Bus<strong>in</strong>ess,<br />
With respect to policy <strong>and</strong> claim reserves <strong>in</strong> the actuarial reports, it<br />
should be noted that it is the current position of OSFI <strong>and</strong> Ontario not<br />
to accept, for purposes of the Annual Statement, reserves that have<br />
been discounted to reflect the time value of money.<br />
<strong>The</strong> memor<strong>and</strong>um concludes with an <strong>in</strong>terim revised st<strong>and</strong>ard of practice: 73<br />
When premium or claim liabilities are not carried as a present value, the<br />
actuary’s report should be amended as follows:<br />
[St<strong>and</strong>ard scope paragraph]<br />
In my op<strong>in</strong>ion, the valuation is <strong>in</strong> accordance with the basis of<br />
account<strong>in</strong>g described <strong>in</strong> Note 1 <strong>and</strong> the f<strong>in</strong>ancial statements fairly<br />
present its results.<br />
Note 1 of the f<strong>in</strong>ancial statements should then disclose that premium <strong>and</strong> claim<br />
liabilities are carried on an undiscounted basis.<br />
72 http://www.actuaries.ca/members/publications/1993/9306e.pdf, accessed November 2010.<br />
73 http://www.actuaries.ca/members/publications/1993/9306e.pdf, accessed November 2010.
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AA Report 1 was repealed <strong>and</strong> replaced with a similar st<strong>and</strong>ard titled <strong>The</strong> Appo<strong>in</strong>ted Actuary’s<br />
Report for Insurance Company Published F<strong>in</strong>ancial Statements (AA Report 2), which was<br />
approved <strong>in</strong> June 1997 <strong>and</strong> effective December 1997. <strong>The</strong> changes were primarily editorial <strong>in</strong><br />
nature <strong>and</strong> not of a substantive nature. Specific sections that were changed <strong>in</strong>clude:<br />
― Exp<strong>and</strong> upon the description of the role of the actuary<br />
― Change <strong>in</strong> word<strong>in</strong>g <strong>in</strong> the actuary’s report<br />
― Limit the contents of the actuary’s report to the valuation <strong>and</strong> presentation of the<br />
policy liabilities for the <strong>in</strong>surance company’s balance sheet <strong>and</strong> <strong>in</strong>come statement;<br />
thus, the exam<strong>in</strong>ation of the <strong>in</strong>surance company’s f<strong>in</strong>ancial condition was elim<strong>in</strong>ated<br />
from this particular st<strong>and</strong>ard of practice (DCAT addressed <strong>in</strong> a separate st<strong>and</strong>ard of<br />
practice)<br />
― Specify that if the actuary determ<strong>in</strong>es policy liabilities on a discounted basis,<br />
<strong>in</strong>vestment <strong>in</strong>come should <strong>in</strong>clude capital ga<strong>in</strong>s<br />
<strong>The</strong> CIA also released an educational note <strong>in</strong> December 1997 with application guidance for AA<br />
Report 2.<br />
Provision for Adverse Deviations <strong>Property</strong> & Casualty Insurance Companies<br />
Council gave its f<strong>in</strong>al approval to the Provision for Adverse Deviations <strong>Property</strong> & Casualty<br />
Insurance Companies (PfAD SOP) at its November 1993 meet<strong>in</strong>g. <strong>The</strong> PfAD SOP became<br />
effective for fiscal years end<strong>in</strong>g after January 1, 1994. Council strongly recommended early<br />
implementation of this st<strong>and</strong>ard where liabilities were discounted to reflect the time value of<br />
money.<br />
<strong>The</strong> PfAD SOP was applicable to all CIA members who were valu<strong>in</strong>g the policy liabilities of a<br />
P&C <strong>in</strong>surance company operat<strong>in</strong>g <strong>in</strong> Canada, domestic or foreign. <strong>The</strong> goal of this st<strong>and</strong>ard was<br />
for actuaries to explicitly determ<strong>in</strong>e the provision for adverse deviations, which was commonly<br />
assumed to be equal to the amount of the present value discount<strong>in</strong>g <strong>in</strong> undiscounted policy<br />
liabilities.<br />
<strong>The</strong> PfAD SOP set out three major valuation variables <strong>in</strong> a P&C <strong>in</strong>surance company valuation:<br />
claims development, re<strong>in</strong>surance recovery, <strong>and</strong> <strong>in</strong>terest rate. “For each valuation variable, the<br />
member is to determ<strong>in</strong>e a marg<strong>in</strong> required <strong>in</strong> excess of the expected value based on the<br />
considerations listed as they relate to the block of bus<strong>in</strong>ess <strong>and</strong> the company’s particular<br />
situation.” 74<br />
<strong>The</strong> PfAD SOP <strong>in</strong>cluded def<strong>in</strong>itions of key terms as well as detailed descriptions of the<br />
considerations related to the three variables (i.e., claims development, re<strong>in</strong>surance recovery, <strong>and</strong><br />
<strong>in</strong>terest rate). <strong>The</strong> st<strong>and</strong>ard <strong>in</strong>cluded examples of high marg<strong>in</strong> situations <strong>and</strong> low marg<strong>in</strong><br />
situations <strong>and</strong> set out low <strong>and</strong> high marg<strong>in</strong> factors.<br />
This st<strong>and</strong>ard was repealed effective January 1, 2003 when the CIA adopted the consolidated<br />
st<strong>and</strong>ards of practice. Key <strong>in</strong>formation from the PfAD SOP has been <strong>in</strong>tegrated <strong>in</strong>to the<br />
74 PfAD SOP, Section 2.
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consolidated st<strong>and</strong>ards of practice as well as an educational note on marg<strong>in</strong>s for adverse<br />
deviation, which was released December 2009.<br />
In 2009, there were three changes <strong>in</strong> the st<strong>and</strong>ard of practice related to marg<strong>in</strong>s for adverse<br />
deviation. Specifically,<br />
― <strong>The</strong> high marg<strong>in</strong> for claims development was <strong>in</strong>creased from 15% to 20%<br />
― <strong>The</strong> low marg<strong>in</strong> for <strong>in</strong>terest rate was decreased from 50 basis po<strong>in</strong>ts to 25 basis po<strong>in</strong>ts<br />
― Explicit recognition of us<strong>in</strong>g stochastic methods to determ<strong>in</strong>e marg<strong>in</strong>s for adverse deviation<br />
was added to the st<strong>and</strong>ards<br />
<strong>The</strong> follow<strong>in</strong>g is an excerpt from the CIA Educational Note Marg<strong>in</strong>s for Adverse Deviations for<br />
<strong>Property</strong> <strong>and</strong> Casualty Insurance.<br />
<strong>The</strong> <strong>in</strong>tent of the <strong>in</strong>crease <strong>in</strong> the high marg<strong>in</strong> is to make clearer to P&C<br />
actuaries that selection of 20% <strong>in</strong> times of great uncerta<strong>in</strong>ty is acceptable. For<br />
example, it may be appropriate for an actuary to select a marg<strong>in</strong> of 20% for<br />
the follow<strong>in</strong>g:<br />
Automobile <strong>in</strong>surance <strong>in</strong> a specific prov<strong>in</strong>ce that is undergo<strong>in</strong>g<br />
significant change due to tort reform or legal challenge to recently<br />
<strong>in</strong>troduced tort reform,<br />
Introduction of a new l<strong>in</strong>e of bus<strong>in</strong>ess or operations <strong>in</strong> a new prov<strong>in</strong>ce<br />
for which there is limited relevant data from which to estimate policy<br />
liabilities,<br />
Significant change expected <strong>in</strong> future claims due to an <strong>in</strong>crease <strong>in</strong><br />
retentions <strong>and</strong> limited data for estimat<strong>in</strong>g the effect of such a change,<br />
Economic upheaval such as the f<strong>in</strong>ancial crisis of the fall of 2008 <strong>and</strong><br />
its effect on long-tail l<strong>in</strong>es of <strong>in</strong>surance such as directors’ <strong>and</strong><br />
officers’ liability.<br />
<strong>The</strong> above examples are only <strong>in</strong>tended to be illustrative of potential situations<br />
for which the actuary may choose to select a claims development marg<strong>in</strong><br />
greater than 15%. However, it is important to recognize that the above<br />
situations may not always necessitate a claims development marg<strong>in</strong> greater<br />
than 15% <strong>and</strong> the decision will be based on the actuary’s assessment of the<br />
uncerta<strong>in</strong>ty around the mean estimate.<br />
<strong>The</strong> change <strong>in</strong> the high marg<strong>in</strong> from 15% to 20% was not <strong>in</strong>tended to shift all<br />
selected marg<strong>in</strong>s for P&C <strong>in</strong>surers. Many actuaries currently select between<br />
10% <strong>and</strong> 15% for many of the longer-tail l<strong>in</strong>es of P&C <strong>in</strong>surance. <strong>The</strong>se<br />
claims development marg<strong>in</strong>s are selected based on a review of the numerous<br />
considerations underly<strong>in</strong>g the actuary's estimate of claim liabilities <strong>and</strong><br />
premium liabilities. It is not expected that these marg<strong>in</strong>s would change simply<br />
due to the <strong>in</strong>crease <strong>in</strong> the high marg<strong>in</strong>. However, if there has been a notable
PACICC – <strong>The</strong> P&C Actuary’s <strong>Role</strong> <strong>in</strong> <strong>Solvency</strong> Monitor<strong>in</strong>g Page 40<br />
change <strong>in</strong> the environment <strong>and</strong> <strong>in</strong> the actuary’s assessment of the various<br />
considerations that <strong>in</strong>fluence the selection of the marg<strong>in</strong> for adverse<br />
deviations, then a change may be justified.<br />
Dynamic Capital Adequacy Test<strong>in</strong>g<br />
<strong>The</strong> work of the CIA on st<strong>and</strong>ards of practice for DCAT extends over many years. Two exposure<br />
drafts preceded the adoption of a f<strong>in</strong>al DCAT st<strong>and</strong>ard of practice by Council on December 14,<br />
1998. <strong>The</strong> st<strong>and</strong>ard was effective for any DCAT work start<strong>in</strong>g on January 1, 1999. With the<br />
publication of Dynamic Capital Adequacy Test<strong>in</strong>g (DCAT SOP), the CIA f<strong>in</strong>ally had st<strong>and</strong>ards<br />
that addressed DCAT for both life <strong>and</strong> P&C <strong>in</strong>surance companies. Prior to December 1998, the<br />
previous dynamic solvency test<strong>in</strong>g st<strong>and</strong>ard of practice only applied to life <strong>in</strong>surance companies.<br />
<strong>The</strong> DCAT SOP was applicable to an actuary’s work exam<strong>in</strong><strong>in</strong>g future f<strong>in</strong>ancial condition if<br />
asked for by the regulators. At the time, it was expected that the regulators would start requir<strong>in</strong>g<br />
P&C <strong>in</strong>surers to have DCAT analyses completed. In the cover memor<strong>and</strong>um of the DCAT<br />
st<strong>and</strong>ard of practice, it was noted that the “CIA will notify the federal <strong>and</strong> prov<strong>in</strong>cial regulators<br />
that the DCAT st<strong>and</strong>ard is effective January 1, 1999.” 75<br />
<strong>The</strong> purpose of DCAT was set out <strong>in</strong> Sections 15 to 17 of the DCAT SOP:<br />
Dynamic capital adequacy test<strong>in</strong>g exam<strong>in</strong>es the effect of various plausible adverse<br />
scenarios on the <strong>in</strong>surer’s forecasted capital adequacy. It is the actuary’s primary tool<br />
for <strong>in</strong>vestigation of an <strong>in</strong>surer’s f<strong>in</strong>ancial condition.<br />
<strong>The</strong> purpose of dynamic capital adequacy test<strong>in</strong>g is to identify<br />
plausible threats to satisfactory f<strong>in</strong>ancial condition,<br />
actions which lessen the likelihood of those threats, <strong>and</strong><br />
actions which would mitigate a threat if it materialized.<br />
Dynamic capital adequacy test<strong>in</strong>g is defensive: it addresses threats to f<strong>in</strong>ancial<br />
condition rather than the exploitation of opportunity. 76<br />
Some of the issues addressed <strong>in</strong> the DCAT SOP <strong>in</strong>cluded:<br />
― Requirements for the determ<strong>in</strong>ation of a satisfactory f<strong>in</strong>ancial condition<br />
― Length of the forecast period<br />
― Base scenario<br />
― Plausible adverse scenarios<br />
― Integrated scenarios<br />
― Ripple effects<br />
― Report<strong>in</strong>g<br />
― Op<strong>in</strong>ion<br />
<strong>The</strong> CIA published an educational note on DCAT <strong>in</strong> January 1999, which was replaced <strong>in</strong> 2009<br />
with a revised educational note. <strong>The</strong> DCAT SOP was repealed <strong>in</strong> 2003 when the consolidated<br />
st<strong>and</strong>ards of practice were adopted. DCAT is now addressed <strong>in</strong> a separate section (Section 2500)<br />
of the consolidated st<strong>and</strong>ards of practice.<br />
75 DCAT, December 1998, cover note.<br />
76 http://www.actuaries.ca/members/publications/1998/9870e.pdf, accessed November 2010.
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Peer/External Review<br />
<strong>The</strong> subject of peer review was discussed for many years by the CIA leadership <strong>and</strong> membership.<br />
<strong>The</strong> follow<strong>in</strong>g is from the September 1997 report titled Appo<strong>in</strong>ted Actuary Peer Review prepared<br />
by the CIA Work<strong>in</strong>g Group on Peer Review.<br />
<strong>The</strong> issue of peer review is one that has been debated among members for several<br />
years. In 1995, anticipation of changes to the compliance review process upon<br />
the adoption of consolidated st<strong>and</strong>ards of practice, <strong>and</strong> a specific desire to<br />
consider the implementation of peer review … Among the task force<br />
recommendations was one that:<br />
…<br />
Council encourage sign<strong>in</strong>g actuaries to have their work reviewed by another<br />
actuary member not <strong>in</strong>volved with that work, <strong>and</strong>, as part of that<br />
encouragement, have guidel<strong>in</strong>es developed for a process which the review<br />
would follow, <strong>and</strong> have ideas developed for ways provid<strong>in</strong>g access to a<br />
review for an actuary who needs help <strong>in</strong> f<strong>in</strong>d<strong>in</strong>g someone to review his or her<br />
work.<br />
<strong>The</strong> OSFI, too, <strong>in</strong> its comments on the task force report <strong>and</strong> <strong>in</strong> other<br />
communications, has urged the CIA to implement peer review without delay. 77<br />
It was six years later before changes <strong>in</strong> the CIA st<strong>and</strong>ards of practice were implemented. In<br />
response to the <strong>in</strong>troduction of regulatory requirements for external review, also commonly<br />
referred to as peer review, the CIA revised Section 1640 of its st<strong>and</strong>ards of practice. “Section<br />
1640 deals with how an actuary whose work is be<strong>in</strong>g reviewed <strong>and</strong> the reviewer treat each other.<br />
<strong>The</strong> ma<strong>in</strong> elements of the st<strong>and</strong>ard consider cooperation between the actuaries, report<strong>in</strong>g by the<br />
reviewer <strong>and</strong> dispute resolution.” 78<br />
<strong>The</strong> revised Section 1640 became effective on September 1, 2003. An educational note,<br />
applicable to the reviews of an <strong>in</strong>surer’s AA reports (i.e., report on the policy liabilities valuation<br />
<strong>and</strong> DCAT report), was released by the CIA as a supplement to the revisions <strong>in</strong> the st<strong>and</strong>ards of<br />
practice. In the cover<strong>in</strong>g memor<strong>and</strong>um with the revised Section 1640, it was noted that the<br />
st<strong>and</strong>ard of practice <strong>and</strong> the educational note did not apply to reviews conducted as part of a<br />
quality control process with<strong>in</strong> an actuary’s firm.<br />
77 http://www.actuaries.ca/members/publications/1997/9746e.pdf, accessed November 2010.<br />
78 http://www.actuaries.ca/members/publications/2003/203067e.pdf, accessed November 2010.
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PART 8 – HISTORY OF P&C INSURER INSOLVENCY IN<br />
CANADA<br />
Table 3 on the follow<strong>in</strong>g page is based <strong>in</strong> part on Table 2 from Predict<strong>in</strong>g P&C Insurer <strong>Solvency</strong><br />
<strong>in</strong> Canada by Anne E. Kleffner <strong>and</strong> Ryan B. Lee, 79 <strong>and</strong> supplemented with <strong>in</strong>formation of the<br />
“cause of failure” supplied by PACICC. We reorganize the table from alphabetic order, as<br />
presented <strong>in</strong> the paper, to year wound up. This enables us to track the potential effect of changes<br />
<strong>in</strong> regulatory <strong>and</strong> actuarial professional st<strong>and</strong>ards with the number of P&C <strong>in</strong>surers who became<br />
<strong>in</strong>solvent or were liquidated.<br />
Key dates of federal regulation <strong>in</strong>clude:<br />
― 1992 – actuarial certification of the adequacy of outst<strong>and</strong><strong>in</strong>g claims <strong>and</strong> unearned premium<br />
provisions was required for all companies’ 1992 annual statements<br />
― 1999 – DCAT reports were required for P&C <strong>in</strong>surers<br />
― 2003 – external review was required on a triennial basis for P&C companies<br />
<strong>The</strong>re does seem to be a reduction <strong>in</strong> the number of federal <strong>in</strong>solvencies after these key dates, <strong>in</strong><br />
particular those related to reserv<strong>in</strong>g practices. S<strong>in</strong>ce the 1992 changes, only one federal <strong>in</strong>surer<br />
has failed due to <strong>in</strong>adequate reserv<strong>in</strong>g or rapid growth (<strong>and</strong> result<strong>in</strong>g <strong>in</strong> <strong>in</strong>adequate reserv<strong>in</strong>g). 80<br />
However, s<strong>in</strong>ce those changes, six prov<strong>in</strong>cial <strong>in</strong>surers failed as a result of <strong>in</strong>adequate reserv<strong>in</strong>g or<br />
rapid growth.<br />
<strong>The</strong>re has also been a strengthen<strong>in</strong>g of the role of the actuary for prov<strong>in</strong>cially regulated P&C<br />
<strong>in</strong>surers. This is primarily by request or directive of the regulator rather than the issuance of<br />
formal regulatory guidel<strong>in</strong>es or changes <strong>in</strong> the <strong>in</strong>surance legislation.<br />
79<br />
August 2006, Haskayne School of Bus<strong>in</strong>ess, University of Calgary.<br />
80<br />
This federal <strong>in</strong>surer entered <strong>in</strong>to run-off at the time of the changes <strong>and</strong> its reserve deficiency pre-dated<br />
the 1992 changes.
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Involuntary Exits <strong>in</strong> Canada 81<br />
<strong>Solvency</strong><br />
Involuntary Exit<br />
Supervisory Wound-up Cause of Failure<br />
Ensign Insurance Company Federal 1961 Deficient loss reserves<br />
North American General Insurance Company Federal 1966 Rapid growth<br />
Wentworth Insurance Company Federal 1966 Rapid growth<br />
American Reserve Insurance Company Federal 1979 Parent<br />
Pitts Insurance Company Federal 1981 Deficient loss reserves<br />
Strathcona General Insurance Company Federal 1981 Rapid growth<br />
Card<strong>in</strong>al Insurance Company Federal 1982 Asset valuation<br />
Canadian Great Lakes & Surety Company Ltd. Ontario 1983 Alleged fraud<br />
Northern Union Insurance Company Manitoba 1983 Deficient loss reserves<br />
Mennonite Mutual Hail Insurance Company Saskatchewan 1984 Catastrophe loss<br />
Ideal Mutual Insurance Company Federal 1985 Parent<br />
Northumberl<strong>and</strong> Insurance Company Federal 1985 Deficient loss reserves<br />
Midl<strong>and</strong> Insurance Company Federal 1986 Parent<br />
United General Insurance Company Federal 1986 Re<strong>in</strong>surance<br />
Advocate General Insurance Company Federal 1989 Deficient loss reserves<br />
American Mutual Liability Insurance Federal 1989 Parent<br />
Century Insurance Company of Canada (<strong>The</strong>) Federal 1989 Affiliate<br />
Eaton Bay Insurance Company Federal 1989 Deficient loss reserves<br />
Ontario General Insurance Company Ontario 1989 Rapid growth<br />
Phoenix Assurance Company of Canada Federal 1989 Asset valuation<br />
National Employers Mutual General Insurance<br />
Association Ltd.<br />
Federal 1990 Parent<br />
Canadian Universal Insurance Company Newfoundl<strong>and</strong> 1991 Alleged fraud<br />
Beothic General Insurance Company Newfoundl<strong>and</strong> 1993 Deficient loss reserves<br />
English & American Insurance Company Federal 1993 Parent<br />
Hil<strong>and</strong> Insurance Company Newfoundl<strong>and</strong> 1994 Alleged fraud<br />
Absta<strong>in</strong>ers Insurance Company Ontario 1995 Deficient loss reserves<br />
Kansa General International Insurance Co. Ltd Federal 1995 Parent<br />
Maplex General Insurance Ontario 1995 Rapid growth<br />
Orion Insurance Company PLC Federal 1995 Parent<br />
GISCO la Compagnie d'assurance Quebec 2000 Deficient loss reserves<br />
Alta Surety Company Federal 2001 Deficient loss reserves<br />
Canadian Millers Mutual Insurance Company Ontario 2001 Rapid growth<br />
Reliance Insurance Company Federal 2001 Parent<br />
Markham General Insurance Company Ontario 2002 Deficient loss reserves<br />
Home Insurance Company Federal 2003 Parent<br />
81 “Cause of Failure” are provided by PACICC.
PACICC – <strong>The</strong> P&C Actuary’s <strong>Role</strong> <strong>in</strong> <strong>Solvency</strong> Monitor<strong>in</strong>g Page 44<br />
APPENDIX A – REFERENCE SOURCES<br />
Anne E. Kleffner, Ryan B. Lee, Haskayne School of Bus<strong>in</strong>ess, University of Calgary. Predict<strong>in</strong>g<br />
P&C Insurer <strong>Solvency</strong> <strong>in</strong> Canada. August 2006.<br />
Autorité Des Marchés F<strong>in</strong>anciers. Actuarial <strong>and</strong> F<strong>in</strong>ancial Supervision of Non-Quebec Chartered<br />
Insurer. April 2010.<br />
Autorité Des Marchés F<strong>in</strong>anciers. F<strong>in</strong>ancial Institutions Supervisory Framework,<br />
Super<strong>in</strong>tendence of <strong>Solvency</strong>. March 2009.<br />
Autorité Des Marchés F<strong>in</strong>anciers. Guidel<strong>in</strong>e Assets Adequacy Requirements <strong>Property</strong> <strong>and</strong><br />
Casualty Insurance. October 2004.<br />
Autorité Des Marchés F<strong>in</strong>anciers. Guidel<strong>in</strong>e on Capital Adequacy Requirements <strong>Property</strong> <strong>and</strong><br />
Casualty Insurance. June 2008.<br />
Autorité Des Marchés F<strong>in</strong>anciers. Guidel<strong>in</strong>e Sound Management <strong>and</strong> Measurements of<br />
Earthquake Exposure. October 1998.<br />
Autorité Des Marchés F<strong>in</strong>anciers. Re<strong>in</strong>surance Risk Management Guidel<strong>in</strong>e. April 2010.<br />
British Columbia Law. F<strong>in</strong>ancial Institutions Act. September 15, 1990.<br />
Canadian Institute of Actuaries – Actuarial St<strong>and</strong>ards Board. St<strong>and</strong>ards of Practice General<br />
St<strong>and</strong>ards. February 2009.<br />
<br />
Canadian Institute of Actuaries – CIA Work<strong>in</strong>g Group on Peer Review. Appo<strong>in</strong>ted Actuary Peer<br />
Review. September 1997.<br />
Canadian Institute of Actuaries – Committee on <strong>Property</strong> & Casualty Insurance F<strong>in</strong>ancial<br />
Report<strong>in</strong>g. <strong>The</strong> Provision for Adverse Deviations <strong>Property</strong> & Casualty Insurance<br />
Companies. January 1994.<br />
Canadian Institute of Actuaries – Committee on <strong>Solvency</strong> St<strong>and</strong>ards for F<strong>in</strong>ancial Institutions.<br />
Dynamic Capital Adequacy Test<strong>in</strong>g. December 1998.<br />
Canadian Institute of Actuaries – Committee on the Application of Rules <strong>and</strong> St<strong>and</strong>ards.<br />
St<strong>and</strong>ards of Practice – Section 1640. September 2003.<br />
Canadian Institute of Actuaries – Committee to Develop the <strong>Role</strong> of the Valuation Actuary.<br />
St<strong>and</strong>ards of Practice for the Appo<strong>in</strong>ted Actuary of an Insurance Company. June 1992.<br />
< http://www.actuaries.ca/members/publications/1992/9240e.pdf>
PACICC – <strong>The</strong> P&C Actuary’s <strong>Role</strong> <strong>in</strong> <strong>Solvency</strong> Monitor<strong>in</strong>g Page 45<br />
Canadian Institute of Actuaries – James K. Christie, Councillor Responsible for <strong>Property</strong> <strong>and</strong><br />
Casualty Matters. Memor<strong>and</strong>um for Recommendations for <strong>Property</strong>-Casualty Insurance<br />
Company F<strong>in</strong>ancial Report<strong>in</strong>g – Section 1.09. December 1, 1997.<br />
<br />
Canadian Institute of Actuaries – Paul M. W<strong>in</strong>okur. Memor<strong>and</strong>um for the St<strong>and</strong>ard of Practice<br />
for the Appo<strong>in</strong>ted Actuary’s Report for Insurance Company Published F<strong>in</strong>ancial<br />
Statement. January 14, 1993.<br />
< http://www.actuaries.ca/members/publications/1993/9306e.pdf><br />
Canadian Institute of Actuaries. Recommendations for <strong>Property</strong>-Casualty Insurance Company<br />
F<strong>in</strong>ancial Report<strong>in</strong>g. January 1990.<br />
< http://www.actuaries.ca/members/publications/1990/9005e.pdf><br />
Darrell Leadbetter, <strong>Property</strong> <strong>and</strong> Casualty Insurance Compensation Corporation, 2010.<br />
F<strong>in</strong>ancial Services Commission of Ontario. 2009 Memor<strong>and</strong>um for Actuarial Report on <strong>Property</strong><br />
<strong>and</strong> Casualty Insurance Bus<strong>in</strong>ess. December 30, 2009.<br />
J. Brian Reeve. Canadian Insurance Regulation: <strong>The</strong> Chance to a Risk Based Approach. 2003.<br />
<br />
Manitoba Law. “Supplementary Provisions Respect<strong>in</strong>g Corporate Governance of Insurers<br />
Incorporated <strong>in</strong> Manitoba” of <strong>The</strong> Insurance Act. January 1, 2009.<br />
MSA Research Inc., database conta<strong>in</strong><strong>in</strong>g f<strong>in</strong>ancial results for year-ended 2009.<br />
Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions of Canada. Account<strong>in</strong>g for Re<strong>in</strong>surance of<br />
Short-Term Insurance Contracts by <strong>Property</strong> <strong>and</strong> Casualty Insurance Enterprises,<br />
Guidel<strong>in</strong>e D-7. February 1998.<br />
Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions of Canada. Annual Disclosures (<strong>Property</strong><br />
<strong>and</strong> Casualty Insurance Enterprises), Guidel<strong>in</strong>e D-1B. February 2009.<br />
Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions of Canada. Appo<strong>in</strong>ted Actuary: Legal<br />
Requirements, Qualifications <strong>and</strong> External Review, Guidel<strong>in</strong>e E-15. November 2006.<br />
Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions of Canada. Branch Adequacy of Assets Test<br />
(BAAT) Branches of Foreign <strong>Property</strong> <strong>and</strong> Casualty Insurance Companies, Guidel<strong>in</strong>e A-2.<br />
January 2010.<br />
Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions of Canada. Capital Targets – Federally<br />
Regulated Insurance Companies, Guidel<strong>in</strong>e A-4. Draft Guidel<strong>in</strong>e May 2010.<br />
Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions of Canada. Earthquake Exposure Sound<br />
Practices, Guidel<strong>in</strong>e B-9. May 1998.<br />
Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions of Canada. Insurance Company Act.<br />
December 13, 1991.<br />
< http://laws.justice.gc.ca/en/I-11.8/<strong>in</strong>dex.html><br />
Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions of Canada. Memor<strong>and</strong>um for the Appo<strong>in</strong>ted<br />
Actuary’s Report on <strong>Property</strong> <strong>and</strong> Casualty Insurance Bus<strong>in</strong>ess 2010. October 26, 2010.
PACICC – <strong>The</strong> P&C Actuary’s <strong>Role</strong> <strong>in</strong> <strong>Solvency</strong> Monitor<strong>in</strong>g Page 46<br />
Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions of Canada. M<strong>in</strong>imum Capital Test (MCT)<br />
for Federally Regulated <strong>Property</strong> <strong>and</strong> Casualty Insurance Companies, Guidel<strong>in</strong>e A.<br />
March 2008.<br />
Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions of Canada. Sound Re<strong>in</strong>surance Practices<br />
<strong>and</strong> Procedures, Guidel<strong>in</strong>e B-3. Draft Guidel<strong>in</strong>e August 2010.<br />
Office of the Super<strong>in</strong>tendent of F<strong>in</strong>ancial Institutions of Canada. Stress Test<strong>in</strong>g, Guidel<strong>in</strong>e E-18.<br />
December 2009.<br />
Quebec Law. An Act Respect<strong>in</strong>g Insurance. January 1, 2010.<br />
<br />
Robert M. Astley, Allan U. Brender, Christopher D. Chapman, Marc Fernet, Michael B.<br />
McGu<strong>in</strong>ness, Robert T. Smith, Hugh G. White, Brian Wood<strong>in</strong>g, J. Dickson Crawford,<br />
Chairman. Report of the Task Force on the Future of the Canadian Institute of Actuaries<br />
<strong>in</strong> the North American Context. December 1989.<br />
Robert M. Hammond. “Insurance Regulation <strong>in</strong> Canada <strong>and</strong> the <strong>Role</strong> of the Casualty Actuary.”<br />
PCAS, LXX, pages 289-296. November 1983.<br />
PACICC – <strong>The</strong> P&C Actuary’s <strong>Role</strong> <strong>in</strong> <strong>Solvency</strong> Monitor<strong>in</strong>g Page 47<br />
APPENDIX B – CIA GUIDING PRINCIPLES<br />
1. In carry<strong>in</strong>g on its activities <strong>and</strong> programs, the Institute holds the duty of the profession to the<br />
public above the needs of the profession <strong>and</strong> its members.<br />
2. To ensure that services are provided by qualified <strong>in</strong>dividuals, the Institute ma<strong>in</strong>ta<strong>in</strong>s publicly<br />
visible programs <strong>and</strong> procedures for the atta<strong>in</strong>ment <strong>and</strong> ma<strong>in</strong>tenance of professional<br />
qualification by its members.<br />
3. <strong>The</strong> Institute develops st<strong>and</strong>ards of professional practice <strong>and</strong> rules of professional conduct<br />
<strong>and</strong>, through its discipl<strong>in</strong>ary process, ensures their compliance by its members.<br />
4. <strong>The</strong> Institute promotes the development of a body of expert actuarial knowledge <strong>and</strong> practice<br />
relevant to Canadian social <strong>and</strong> economic needs. It encourages actuarial research <strong>and</strong><br />
scholarly activity <strong>and</strong> the dissem<strong>in</strong>ation of the results among its members. It encourages the<br />
application of actuarial science <strong>and</strong> technique to new areas where these are relevant.<br />
5. <strong>The</strong> Institute cooperates with governments <strong>and</strong> public bodies <strong>and</strong> makes timely <strong>and</strong> relevant<br />
contributions to public policy issues.<br />
6. To assure a cont<strong>in</strong>u<strong>in</strong>g supply of qualified professionals, the Institute encourages the<br />
recruitment <strong>and</strong> tra<strong>in</strong><strong>in</strong>g of new actuaries.<br />
7. <strong>The</strong> Institute serves the professional needs of all Canadian actuaries regardless of area of<br />
practice, language, or geographic region.<br />
8. To assist its members <strong>in</strong> their professional activities, the Institute develops technical support<br />
<strong>in</strong>clud<strong>in</strong>g collection <strong>and</strong> analysis of statistical data, <strong>and</strong> the publication of actuarial<br />
h<strong>and</strong>books <strong>and</strong> texts.<br />
9. <strong>The</strong> Institute represents Canadian actuaries <strong>in</strong>ternationally <strong>and</strong> cooperates with other national<br />
actuarial bodies <strong>in</strong> areas of mutual <strong>in</strong>terest.<br />
10. <strong>The</strong> Institute provides opportunities for the professional development of its members.
PACICC – <strong>The</strong> P&C Actuary’s <strong>Role</strong> <strong>in</strong> <strong>Solvency</strong> Monitor<strong>in</strong>g Page 48<br />
APPENDIX C – OSFI 2010 MEMORANDUM FOR THE<br />
APPOINTED ACTUARY’S REPORT ON PROPERTY AND<br />
CASUALTY INSURANCE BUSINESS<br />
TABLE OF CONTENTS<br />
1. INTRODUCTION<br />
2. NOTE ON REGULATORY REQUIREMENTS<br />
2.1 Application of Professional St<strong>and</strong>ards to the Appo<strong>in</strong>ted Actuary’s Report <strong>and</strong> Valuation<br />
2.2 Differences (if any) Between <strong>Actuary's</strong> Valuations <strong>and</strong> Correspond<strong>in</strong>g Annual Return<br />
Liabilities<br />
2.3 Fil<strong>in</strong>g of Reports<br />
2.4 Persons Sign<strong>in</strong>g the Appo<strong>in</strong>ted <strong>Actuary's</strong> Report<br />
3. SPECIAL LINE OF BUSINESS CONSIDERATIONS<br />
3.1 Mar<strong>in</strong>e Insurance<br />
3.2 Title Insurance<br />
3.3 Accident <strong>and</strong> Sickness Insurance<br />
4. FORMAT OF THE APPOINTED ACTUARY'S REPORT<br />
4.1 Report Outl<strong>in</strong>e<br />
4.2 Table of Contents<br />
5. CONTENTS OF THE APPOINTED ACTUARY’S REPORT<br />
5.1 Introduction<br />
5.2 Expression of Op<strong>in</strong>ion<br />
5.3 Supplementary Information Support<strong>in</strong>g the Op<strong>in</strong>ion<br />
5.4 Executive Summary<br />
5.5 Description of Company<br />
5.5.1 Ownership <strong>and</strong> Management<br />
5.5.2 Bus<strong>in</strong>ess<br />
5.5.3 Re<strong>in</strong>surance<br />
5.6 Data<br />
5.7 Claims Liabilities<br />
5.7.1 Undiscounted Claims Liabilities<br />
5.7.2 Claims Expenses<br />
5.7.3 Comparison of Actual Experience with Expected Experience <strong>in</strong> Prior Year-End<br />
Valuations<br />
5.7.4 Discounted Claims Liabilities<br />
5.7.5 Re<strong>in</strong>surance Ceded<br />
5.8 Premium Liabilities<br />
5.9 Other Liabilities/Other Assets
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6. SPECIFIC DISCLOSURE REQUIREMENTS<br />
6.1 Dynamic Capital Adequacy Test<strong>in</strong>g (DCAT)<br />
6.2 New Appo<strong>in</strong>tment<br />
6.3 Annual Required Report<strong>in</strong>g to the Board or Audit Committee<br />
6.4 Cont<strong>in</strong>u<strong>in</strong>g Professional Development Requirements<br />
6.5 Disclosure of Compensation<br />
6.6 Re<strong>in</strong>surance<br />
7. REVIEW PROCEDURES<br />
7.1 OSFI’s Review Procedure<br />
7.2 External Review Program<br />
7.3 Fil<strong>in</strong>g Directions<br />
8. UNPAID CLAIMS AND LOSS RATIO ANALYSIS EXHIBIT<br />
8.1 Introduction<br />
8.2 Data<br />
9. Appendix I - Expression of Op<strong>in</strong>ion<br />
10. Appendix II - Unpaid Claims <strong>and</strong> Loss Ratio Analysis Exhibit<br />
11. Appendix III - Annual Return L<strong>in</strong>es of Bus<strong>in</strong>ess<br />
12. Appendix IV - Unpaid Claims <strong>and</strong> Loss Ratio Analysis Exhibit<br />
12.1 Introduction<br />
12.2 Data<br />
12.3 Information Conta<strong>in</strong>ed <strong>in</strong> the Unpaid Claims <strong>and</strong> Loss Ratio Analysis Exhibit (by<br />
Column)