Spring 2019 - Q19E - DCAT - Subsequent Events

chrisboersma

I just want to see people squirm...

So can someone please explain using the subsequent decision tree or the SOPs try why the following answer provided is correct (I'm assuming they're using the subsequent event table). AFAIK the only thing we can do is to disclose that it occurred and is not in the report (it is not a subsequent event regardless of whether it occurred BEFORE the report date or AFTER).

Question:

A catastrophic event occurs after the report (DCAT) is completed, but before the presentation of the Board is made. Describe the actions that the Appointed Actuary should take.

Answer:

If the event has a material impact on the company and invalidates the report, the actuary should amend the report and disclose it. However, if the event is not material, should only disclose

[following 1820 I presume]

graham

Interesting observation. You're right that it isn't a subsequent event, because the actuary became aware after the report date. That means the subsequent event decision tree doesn't apply.

I think the answer is in old CSOP 1800 (Reporting), specifically 1820.04. But CSOP 1800 was not on the 2019.Spring syllabus. The relevant paragraph would be:

• 1820.04: Subsequently, the actuary should withdraw or amend the report if information comes to hand after the report date that invalidates the report.

Unless this information is somewhere in the DCAT reading (I couldn't find it) this could potentially be an invalid exam question.

Note that the CSOP syllabus reference has been updated for the 2019.Fall exam and the reporting section in this most recent CSOP publication is now 1700, and it is on the syllabus.

P.S. Link to 2019.Syllabus:
* https://battleactsmain.ca/pdf/Exam_6C_Syllabus_2019_1.pdf

chrisboersma

Page 18 of Subsequent Event Paper [1820.33, 1820.35 is on the decision tree]

If the omission of data is discovered on August 16, which is usually after the report date, the event is not classified as a subsequent event and the actuary would proceed down the third branch of the event decision tree. The actuary would answer the question: “Would the event have been reflected in the work if it were a subsequent event?” The answer to this question is typically yes. The final decision would be whether or not the event invalidated the report. As stated in paragraph 1820.33 of the Standards of Practice, the report would be invalidated if the event reveals a data defect or a calculation error. This event represents a data defect and thus the report would be invalidated.

I've highlighted the key deciding factor. So the real question is "Would the event have been reflected?". I have no basis on reflect with information provided in Question 19 (even if this was a subsequent event). So I would say no to that question and follow decision tree to:

No further action required

Although, given the potential magnitude of event, a comment in the release advising users that the catastrophe was not considered should be mentioned.

graham

Oh yes. I was so focused on the middle branch and subsequent events that the right branch of the decision tree slipped my mind.

xQEDx

Based on what I see, I also think that is should be no further action required.

It falls in the right side of the tree, and then you have to ask yourself if it would have been reflected if it were a subsequent event.

Going down the middle branch to answer this question:

Error? No
When? After calc date
Different? Yes, after calc date
Purpose? Report on entity as it was

Therefore, do nothing. This then implies the answer to the "Would the event have been reflected if it were a subsequent event" is No. Therefore, do nothing.

Right?

chrisboersma

@graham - are you able to explain the CAS solution/logic here.

I have no clue how I could've gotten to the CAS solution given the materials provided? Or is there anyone who can explain this to me?

I unsuccessfully appealed this question:

...your proposed solution was given partial credit. Upon review of the appeal, we have confirmed the original grading approach to be appropriate

chrisboersma

It's worth pointing out this is very similar to answer as 6US Fall 2015 - 16B [Which is based on NAIC]

NAIC is very clear that:

5. Information that becomes available prior to the issuance of the financial statements relating to a material Type II subsequent event shall not be recorded in the financial statements, but shall be disclosed in the notes to the financial statements. If an event is of such a nature that pro forma disclosures are necessary to keep the financial statements from being misleading, disclosure of supplemental pro forma financial data shall be made including the impact on net income, surplus, total assets and total liabilities giving effect to the event as if it had occurred on the date of the balance sheet.

It's worth pointing out the handling of Type II events appears to be different in Canada vs. USA (disclose in USA, vs invalidate in Canada). Nothing in the DCAT documentation from CIA suggests it is a "pro forma disclosure" (special type of financial forecast). DCAT is a way to measure the companies CURRENT ability to absorb losses by simulating said losses and reviewing their impact.

graham

I think they were intentionally trying to trick people with this question. The event decision tree bases the appropriate action on the actuary's awareness relative to the calculation date and the report date. It doesn't say anything about the "presentation date" of the report to the Board.

You could have a situation where the report was finished by Feb 15 and the board meeting was scheduled for Mar 2. If the catastrophe occurred on Mar 1, it wouldn't even be possible to amend the report before the Mar 2 meeting. This is a freak situation that would require consideration beyond the simple deterministic decision tree given in the reading. Based on the tiny amount of information provided in the question, you could make a case for either option: "inform only" or "amend". In reality, the different possible scenarios are vast and for them to be so strict is pure silliness.

This reading has been on the syllabus for a long time and if they asked a reasonable question, everyone would score well. But they are desperately looking ways to spread the scores out and that's probably the main reason they rejected your appeal rather than whether or not you made a good point.

This is why I think they will test the new readings heavily: BCAR.Cdn2018, and the IFRS material. People aren't familiar with it yet so questions on that material will produce low scores. Those new readings are a great opportunity to separate yourself from the pack.

chrisboersma

Question 19E:

After the report is completed, but before the presentation to the Board is made.

Ok that makes more sense:

The report date is defined as the “date on which the actuary completes the report on his or her work. It usually differs from the calculation date.” Finally, the term “report” refers to “an actuary’s oral or written communication to users about his or her work.

So fall under 4.3 - After Reporting Date

If the actuary becomes aware of the event following the report date, the event, by definition, is not a subsequent event. Nevertheless, the event could trigger three possible actions depending on the type of event and the magnitude of the effect of the event. The actuary may: (1) take no action, (2) inform users but not change the work, or (3) withdraw or amend the report.

And their reference to "not a subsequent event" in the solution key makes more sense. Thanks.

ugh! thanks. Any one of the following 3 actions I assume would get full marks

Kh92

There's a few discussion going on above but I just wanted to throw my 2 cent ... Could it due to the fact that DCAT is referred instead of valuation? Since DCAT is referring to the insolvency of insurer, it could be argued that the P is to report on entity as it will be.

With that being said, my follow-up questions are, should we assume the questions are referring to valuation unless being told specifically. If that's the case, should we treat valuation and FCT (ex-DCAT) differently?

graham

I think you have a good point because the question is about a DCAT (FCT) report and the purpose of that is different from a valuation.

It was confusing because the examiners were trying to create a question that ties together 2 different readings: DCAT and subsequent events. But the subsequent events reading is mainly about valuation so you had take an educated guess as to how interpret the given catastrophic event in the DCAT context.

About the second point in your post: The question should tell you whether the actuary's report is a valuation or a DCAT (FCT) report. You shouldn't have to make an assumption. As you mentioned however, it may be necessary to treat valuation and DCAT differently because the purpose of a valuation is to report on the entity as it was whereas the purpose of DCAT is report on the entity as it will be.