KPMG PACICC

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Author:
ED_6C3
ID:
270274
Filename:
KPMG PACICC
Updated:
2014-04-12 10:30:40
Tags:
6C
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Actuarys Role
Description:
6C
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  1. Purpose and Scope
    • PACICC is interested in determining if there is a relationship between the financial solidity of P&C insurers who use the services of actuaries and those that do not.
    • Focus is narrow as it only looks at the role of the actuary as defined by regulatory and professional requirements by tracking the link between changes in requirements and solvency.
  2. Research Methodology Process (4 questions)
    • is a DCAT report required on an annual basis?
    • is there a requirement for the submission of an actuarial report and opinion statement?
    • is there a requirement to follow the MCT guidelines set out by OSFI?
    • is actuarial external review (peer review) required for actuarial reports?
  3. Financial Metrics - Federal and Provincial P&C Insurance Companies
    More than 75% of total premium volume in Canada is written by federally incorporated companies.
  4. Federal vs. Provincial regulation
    • share responsibility for supervision
    • federal controls certain activities of all federally incorporated and non-resident companies
    • provinces have similar responsibilities for provincially incorporated companies
    • OSFI is the dominant insurance solvency regulator, leaving provincial bodies mainly focused on distribution issues such as market conduct and consumer protection
  5. Provincial responsibilities
    • regulatory requirements directed at solvency
    • licensing of insurance companies
    • terms and conditions of insurance contracts and their interpretations
    • licensing of agents, brokers, and claim adjusters
    • sales practices, claim settlement practices
  6. Collaborative approach to regulation involves:
    • federal and provincial Superintendents
    • representatives from CIA and Canadian Institute of Chartered Accountants
    • representatives from the insurance industry (such as IBC)
    • regular meetings are held to discuss key issues and changes in each practice
    • changes by one organization are often complemented by actions in other organizations
  7. Evolution of insurance regulation
    • the 1980s: concept of requirement to file annual statement signed by competent actuary to review adequacy of reserves and reinsurance arrangements (Hammond’s speech)
    • the 1990s: strengthened surplus test provisions; addressed excessive use of reinsurance; required actuarial certification of adequacy of outstanding claims and UEP provisions; creation of PACCIC; introducing the AA
    • the 2000s: introduction of discounted policy liabilities; OSFI implements MCT and mandates external review of AA reports
  8. Duties of the AA
    • report on the value of actuarial and other policy liabilities at the end of the financial year
    • report on the financial condition, including expected future financial condition (DCAT)
    • report on any matters that have come to his attention that, in his opinion, have material adverse effect on the financial position of the company and require rectification
  9. Levels of regulations and guidance from OSFI
    • guidelines and related advisories
    • regulatory and legislative advisories
    • rulings
    • supervisory advisories
  10. Expected qualifications of the AA
    • appropriate Canadian practical experience, defined as work in Canada for at least 3 / last 6 years, of which at least 1 performing valuation of ins Canadian actuarial liabilities
    • experience with CIA's SoP and relevant insurance legislation and regulation
    • up to date with respect to the CIA's Continuing Professional Development requirement
    • is in possession of an up-to-date AA Certificate from the CIA
    • has not been subject of adverse findings by a CIA Disciplinary Tribunal (can be overruled by Superintendent if the circumstances support it)
  11. External reviewer duties:
    • ascertain that work of AA is within the range of AAP, and consistent with OSFI regulations
    • review the adequacy of procedures, systems and the work of others relied on by the AA, to the extent that these are not reviewed by the external auditor
    • discuss with the AA the appropriateness of each of the assumptions made and the methods employed in the valuation of actuarial policy liabilities
    • determine whether the AA report accurately describes the assumptions and methodology
    • review and discuss with the AA the methodology, assumptions and scenarios of DCAT
  12. MCT Guideline A
    • provides framework within which Superintendent assesses P&C insurer’s capital adequacy
    • applies to foreign companies operating in Canada on a branch basis (asset/liability in CA)
    • describes capital required using risk-based formula, and defines capital available
  13. Purposes of reinsurance as a risk management tool
    • reduce insurance risk and the volatility of financial results
    • stabilize solvency
    • make more efficient use of capital
    • better withstand catastrophic events
    • increase underwriting capacity
    • draw on reinsurers’ expertise
  14. Risks of using reinsurance:
    • operational risk
    • legal risk
    • counterparty risk
    • liquidity risk
  15. Provincial legislation vs ICA
    • AB and ON are very similar, QC and BC have most of the same provisions
    • NU, YK, NW barely mention the Actuary, NS has no mention at all
    • NB, PEI, MA only mention the Actuary in relation to fraternal societies, and NB, PEI include provisions for appointment, vacancy, etc.
    • SK has significantly less requirements than ICA
  16. Provincial insurance oversight of solvency
    • all use same P&C-1 that includes MCT requirements
    • provinces not requiring DCAT: MA, SK, NL
    • provinces not requiring review: SK, NS
    • provinces not requiring AAR: MA, SK
    • NB uses Superintendent discretion for all reports
  17. Purposes of the CIA
    • advance and develop actuarial science
    • promote the application of actuarial science to human affairs
    • establish, promote and maintain high standards of competence and conduct within the actuarial profession
  18. Objectives of the ASB (Actuarial Standards Board):
    • continuous review of SoP and determine need for alteration, expansion, elimination
    • direct and manage development of SoP in all areas of actuarial practice
    • adopt SoP within its sole discretion and pursuant to such procedures it deems appropriate
    • ensure adequate communication of SoP to Members, Associates and Affiliates, public, regulatory and judicial bodies, government, other professions
  19. The Crawford Report (1988)
    • task force that was established to consider the future of the CIA
    • Recommendation 1: that the CIA adopt a new statement of purpose which gives precedence to service in the public interest over self-interest of the member
    • Recommendation 9: that the CIA increase its support of R&D for P&C insurance, develop SoP for this area, and increase its contribution to basic and continuing education
    • Recommendation 12: that the CIA resolve to improve and expand its contribution to the development and direction of public policy issues through effective monitoring of emerging issues, vigorous participation in public policy debates, continued and strengthened contact with government regulators and policy makers
  20. Data requirement
    • if the actuary reports without reservation with respect to the data, it should be sufficient and reliable for the work
    • if reliable data is unobtainable but the defect does not negate the usefulness of the results, report a usual opinion with reservation in respect of data
    • if defect precludes a useful result, report so and make no report
  21. Different types of assumptions
    • model: for each matter taken into account in the model
    • data: relieve insufficiency or unreliability in the obtainable data
    • other: legal, economic, demographic, social environment assumptions
  22. Factors influencing the degree of conservatism
    • confidence in expected development pattern
    • quality and depth of historical data
    • statistical fluctuations affecting ultimate claim frequency and severity
    • inflation rate implicitly or explicitly assumed in valuation
    • conservatism of the interest rate used to determine the PV of policy and claim liabilities (if not discounted, consider the impact of discounting in PfAD)
  23. Requirements prior to accept the position of AA
    • should only accept if he has the necessary qualifications, experience, and knowledge
    • should consult with the previous AA to determine whether there are any professional reasons not to accept the appointment
    • ensure that the BoD agrees to the requirements needed to fulfill the responsibilities
    • if requirements can’t be satisfied, shouldn’t accept appointment. If conditions change such that requirements are no longer satisfied and won’t be in a timely fashion, resign
  24. Requirements regarding access to information
    • arrange access to records, accounts and documents necessary to have an understanding of the company’s obligations and the resources available to meet obligations
    • establish a monitoring process for types of transactions and conditions which may have a material adverse effect on the financial condition of the company
  25. Requirements regarding board reporting
    • identify, report and follow up if a transaction or condition meets above description
    • annual report to BoD
    • take all reasonable steps to be continually apprised of what current report would indicate
  26. Purpose of DCAT
    • identify plausible threats to satisfactory financial condition
    • identify actions which lessen the likelihood of those threats
    • identify actions which would mitigate a threat if it materialized
    • DCAT is defensive, i.e. addresses threats rather than exploit opportunities
  27. Key dates of federal regulation
    • 1992: actuarial certification of the adequacy of claims and UEP provisions
    • 1999: DCAT report requirement
    • 2003: external review required on triennial basis
  28. Observed reduction of insolvencies
    • after each of the 3 major regulatory changes, we observed a reduction in the number of federal insolvencies, in particular after changes related to reserving practices
    • only 1 federal insolvency since 1992
    • there has also been a strengthening of the role of the AA for provincially regulated insurers, primarily by request or directive of the regulator rather than formal guidelines

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