CIA.AA-IFRS17

Reading: Role of the Appointed Actuary Under IFRS 17

Author: Canadian Institute of Actuaries (CIA)

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Study Tips

Recall that the article OSFI.AA covers responsibilities of the Appointed Actuary (AA). Some of those responsibilities have changed due to the implementation of IFRS 17 and here we cover those changes. I think an exam question based on the case studies from the appendix is the most likely type of exam question from this reading. In other words, pay attention to the case studies!

Estimated study time: 2 days (not including subsequent review time)

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No past exam questions are available for this reading.

reference	part (a)	part (b)	part (c)	part (d)

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In Plain English!

The implementation of IFRS 17 in Canada, effective from January 1, 2023, has brought fundamental changes to valuation methods, assumptions, and disclosure protocols for insurance contracts. However, the Appointed Actuary (AA) still holds responsibility for providing opinions on these valuations for GAAP reporting, which is used for both public and regulatory purposes. The Actuarial Standards Board (ASB) has recommended several changes to the CIA Standards of Practice (SOP) to accommodate the shift from IFRS 4 to IFRS 17, including adopting the International Standards of Actuarial Practice (ISAP) for IFRS 17. These changes, along with the AA's opinions, demonstrate the continued importance of actuarial skill and judgement in the process. However, certain elements of the IFRS 17 valuation might be set by other departments such as finance or management. The source text outlines these changes but does not cover certain other topics like the valuation of investment or service contracts or the impact of IFRS 17 on financial condition testing, as the AA's role in these areas remain unchanged.

Section 1: What Has Not Changed

I don't think asking you what hasn't changed is a likely exam question but I could see an exam question asking you what has changed, so for context it's probably a good idea to know what hasn't changed. The poor AA has to learn all these new procedures!

Question: Briefly describe the responsibilities of the AA that have not changed under IFRS 17. [Hint: POOR-AA]

• Policy Liabilities: The definition and coverage of "policy liabilities" are unchanged, extending to certain investment and service contracts, but excluding non-regulated entities.
• Opinion: The AA continues to provide opinions on policy liabilities.
• Others: The AA both relies on and provides work for others, including external auditors.
• Reporting: The AA still creates formal reports for regulators following appropriate guidelines.

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• Appointment: The AA's role remains reserved and requires a formal appointment with duties outlined in the financial statements as per the Insurance Companies Act.
• AAP: The AA ensures that calculation of policy liabilities follows accepted actuarial practices (AAP) in Canada.

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Section 2: Using and Taking Responsibility for the Work of Others

Under IFRS 17, accounting policies, methods, or assumptions may be set by finance or other management departments, leading to the AA possibly using and taking responsibility for others' work more frequently. Note the distinction between merely using another person's work versus using and taking responsibility of another person's work.

Question: What sort of report would the AA issue if they used but did not take responsibility for the work of others?

• The AA would issue a report with reservations.

Question: What sort of report would the AA issue if they used and took responsibility for the work of others?

• The AA would issue a report without reservations (assuming everything else regarding the policy liabilities was in order.)

Alice-the-Actuary is working on her AA report but she isn't sure when to merely use another person's work or when to use and take responsibility. Ian-the-Intern dug up some guidelines for her to follow.

Question: Describe 2 situations where Alice would use but not take responsibility for the work of others.

• if the work conflicts with what would be appropriate for the purpose of the actuarial services
• if the actuary is unable to judge the appropriateness of the work (assumption / methodology) without lots of extra work beyond the scope of the assignment

Ok, but about when those conditions aren't satisfied?

Question: Describe when Alice would use and take responsibility for the work of others.

• when such actions are justified based on considerations such as:

– communication with the other person that is early and periodic

– confidence in the other person’s qualifications & competence

– awareness by the other person of how the actuary intends to use the other person’s work

The source text goes on the list 12 items (accounting policies, methods, or assumptions) that may be set by others. Alice recommends you read the list but you don't have to memorize all of them. It should be sufficient if you memorize 3. (The hint Ian-the-Intern came up with doesn't mean anything but the first 9 letters at least spell a word that kinda-sorta sounds like English!)

Question: Identify 12 items (accounting policies, methods, or assumptions) that may be set by others. [Hint: PADDIDLER-CCR]

• PAA accounting policy choices (Ex: recognition of acquisition expenses, discounting)
• Application of variable fee approach (VFA) (qualification criteria, use of risk mitigation option)
• Discount rates (whether a bottom-up or top-down approach is used)
• Directly attributable expenses (identifying directly attributable expenses)
• Insurance contract classification (assessment of “significant” insurance risk)
• Deferred acquisition expenses (criteria for testing recoverability of deferred acquisition expense assets)
• Level of aggregation (threshold for groups with no significant possibility of becoming onerous)
• Eligibility for premium allocation approach (PAA) (criteria and testing)
• Risk adjustment for non-financial risk (RA) (assessing the compensation required by the entity for taking non-financial risk)

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• Contract boundary (assessment of practical ability to reset the terms of a contract at a renewal date)
• Coverage units for amortization of contractual service margin (CSM) (whether to discount or not)
• Reinsurance contracts held (grouping, discount rate, RA)

Alice has decided to memorize the 3 that are highlighted because they seem the easiest.

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Section 2.1: Deciding Whether to Take Responsibility for Items Set by Others

Our good friend Alice-the-Actuary is a legend (in her own mind!) and hates taking responsibility for items set by others! Nonetheless, she sometimes has to do so and here are 5 questions she asks herself when making that determination. For now, just read through them. They are all common sense. We will revisit them when we look at the case studies in the appendix.

1. Is the policy or method or assumption that has been set by another party consistent with a reasonable interpretation of the IFRS 17 standard?
2. Is the policy or method or assumption that has been set by another party consistent with accepted actuarial practice in Canada?
3. Are the recommendations in Subsection 1510 of the CIA SOP for “use and take responsibility for” satisfied (i.e., the actuary has confirmed the other person’s qualifications, competence, integrity and objectivity, and the other person is aware of how the actuary intends to use that person’s work)?
4. Is the policy or method or assumption similar to what the AA would have chosen?
5. Is the AA able to judge the appropriateness of the policy or method or assumption set by another party without performing significant additional work beyond the scope of the assignment

You can remember these points by remembering the underlined phrases above.

Section 2.2: Reporting with Reservation

Ok, this is a straight memory question. Exam questions often ask you to regurgitate bullet point lists from the source text and this section has a classic example of that.

Question: Identify examples of situations where it may be appropriate to report with reservation. [Hint: CLINT]

Change in assumption or methodology affecting disclosure items:

• where an item valued by the actuary is materially affected by a change in assumption or methodology that is not disclosed in the financial statements.

Liabilities different than those calculated by the actuary:

• where the financial statements of an insurer report policy liabilities that are materially different from those calculated and reported to the regulator by the AA.

Impracticality of restatement:

• where restating the preceding year valuation to be consistent with the current year valuation would be appropriate but not practical.

New appointment:

• where the newly appointed AA uses but is unable to take responsibility for a predecessor AA’s work.

Takeover of insurer with insufficient records:

• where the AA is unable to judge the appropriateness of a predecessor AA’s work.

For Alice, the word CLINT always makes her think of Clint Eastwood. He is Alice's hero because he's a total bad-ass! And it's totally bad-ass to report an opinion with reservation (because your job could definitely be in danger, even if you're correct. Maybe especially if you're correct!)

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Section 3: The Opinion

The main point in this section is that the wording of the Appointed Actuary's (AA's) opinion under IFRS 4 has been revised to reflect changes in AA's role and the introduction of new financial statements under IFRS 17. The first thing you should do is memorize the new wording used in the opinion. Ian-the-Intern was having a lot of trouble memorizing this so Alice highlighted the key words in red font. If you memorize those key words, then everything else should fall into place.

To the policyholders [and shareholders] of [the ABC Insurance Company]: I have valued the policy liabilities of [the Company] for its [consolidated] financial statements prepared in accordance with International Financial Reporting Standards for the year ended [31 December xxxx]. In my opinion, the amount of policy liabilities is appropriate for this purpose. The valuation conforms to accepted actuarial practice in Canada and the [consolidated] financial statements fairly present the results of the valuation.

There is a lot of detail in this section of the source text but I think you can ignore most of it. The text describes the differences in the wording in detail but I think you should be ok on the exam if you have memorized the above wording and you can answer the following question:

Question: Describe 3 differences in the wording of the AA's opinion under IFRS 17 versus the old standard, IFRS 4

IFRS Compliance: The revised opinion stresses that the policy liabilities valuation complies with relevant IFRS standards, including IFRS 17 (insurance contracts), IFRS 9 (investment contracts), and IFRS 15 (service contracts).

Appropriate for Financial Statements: The AA no longer opines that liabilities make "appropriate provision for all policy obligations." Instead, the AA now asserts the amount of policy liabilities is appropriate for inclusion in the financial statements.

Broader Scope: The scope of "fairly present" in the AA's opinion is broader under IFRS 17. This reflects more extensive presentation and disclosure requirements, including details on insurance contract liabilities and more line items derived from the AA’s valuation.

I thought the second point, Appropriate for Financial Statements was interesting. It seems to be saying that "appropriateness for all policy obligations" is different from "appropriateness for financial statements". I'm not sure why they are different. Could it be that the amount reported in the financial statements is appropriate even if it doesn't make sufficient provision for all policy obligations? Unfortunately, this is not explained in the text.

Section 4: Additional Considerations for Valuation Work That Is Not Subject to IFRS 17

Alice doesn't think there's anything in this section worth memorizing. Recall that section 2200 from CIA.CSOP covers Insurance Contract Valuation (Canadian Considerations) and section 2300 covers Insurance Contract Valuation (International Actuarial Standards of Practice). Here's a quick summary:

• When insurance contract valuation doesn't comply with IFRS 17, sections 2200 and 2300 of the CIA SOP are not applicable.
• In these cases, the Appointed Actuary (AA) must identify and follow the applicable standards, guidance, or laws specific to the engagement, possibly seeking assistance from stakeholders like auditors or accountants.
• If there are no specific accounting standards applicable, the AA may opt to follow IFRS 17 or the general section of the CIA SOP and related educational notes on actuarial considerations for valuations not subject to IFRS 17.

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APPENDIX: Case Studies

The question posed in each of these case studies is this:

Could the given scenario lead to the AA reporting with reservation in the financial statements.

This is a situation where I think it would benefit you to read the section in the source text. It reminds me of the reading on subsequent events, CIA.Subseq, where past exam questions have essentially given you one of the scenarios described in the case studies and then asked you to draw the appropriate conclusion. You should read the details in the source text, but Ian-the-Intern has kindly created the the summary table shown further down. (Actually, Alice threatened to kick Ian's backside, Clint Eastwood style, unless he did it! Obviously he did it because he's terrified of Alice!)

Before you do anything else, here is a totally awesome exam hack from Alice:

Alice's Totally Awesome Exam Hack: The first 2 questions in each scenario are always about whether there is consistency with IFRS 17 and AAP (Accepted Actuarial Practices)

So if you get an exam question on this topic, you can be 99.9% sure that if you list those first 2 questions, you will get pretty good partial credit, even if you are totally clueless on how to answer the question. Remember that passing Exam 6 is as much about exam strategy as knowledge. Note that Scenario 2 is the most complicated so I bet they wouldn't ask that on the exam. (Remember that the Exam 6-Canada committee has to figure out these new readings just like the rest of us, and they are all volunteers and human nature is usually to take the easy way out!)

Note: These scenarios generally do not have a clear-cut answer. The text seems to suggest discussing any outstanding issues with management. If the issues are resolved then the AA can report without reservation. Otherwise, the AA would need to report with reservation. On the exam, I suspect either answer would be acceptable provided you justify your conclusion appropriately.

Scenario	Description	Questions	Conclusion
1	Discount rates/Illiquidity premium: Entity backs illiquid insurance contract liabilities with liquid assets.	[Q1] Is the approach to setting discount rates consistent with IFRS 17? [Q2] Is the approach to setting discount rates consistent with accepted actuarial practice? [Q3] Are the discount rates similar to what the AA would have chosen?	Discuss issue with management. If resolved, report without reservation. If not, report with reservation.
2	Grouping: Management uses a set of contracts (“set-based”) approach to grouping	[Q1] Is the set-based approach to grouping consistent with IFRS 17? [Q2] Is the set-based approach to grouping consistent with accepted actuarial practice? [Q3] Are there any legal constraints to pricing? [Q4] Are the assumptions used in the individual contract calculations set at a higher level of aggregation than the pricing assumptions, which could create a bias in the results? [Q5] Are the contracts onerous due to seasonal factors? [Q6] Is the number of onerous contracts insignificant, and the impact immaterial?	In the event that the due diligence above proves to be sufficient, the AA would be able to report without reservation. If the AA is not able to accept the approach above, or results of the analysis are inconclusive, the AA would consider discussing the matter with management to try to make the appropriate changes to the grouping and allocate contracts for issue ages 60-65 to the onerous group. In that case, the valuation would be in accordance with IFRS 17 and the AA would report without reservation.
3	Reinsurance (risk adjustment): The entity sets the compensation it requires for bearing uncertainty related to the mortality risk assumption (Reinsurance)	[Q1] Is the risk adjustment for non-financial risk consistent with IFRS 17? [Q2] Is the risk adjustment for non-financial risk consistent with accepted actuarial practice?	The AA would refer to the CIA guidance on risk adjustments as it pertains to reinsurance, as provided in the educational notes
4	Splitting of a reinsurance treaty	[Q1] Is the identification of contracts consistent with IFRS 17? [Q2] Is the identification of contracts consistent with accepted actuarial practice? [Q3] Is the identification of contracts similar to what the AA would have chosen?	If the AA is convinced that keeping the treaty as a single contract is required, the AA would discuss with management and the auditor to try to resolve the issue. If it persists, the AA may assess the materiality of the difference before deciding whether reporting with reservation is appropriate.
5	PAA earned revenue: For a group of contracts valued under the PAA, management allocates revenue to reporting periods based on the passage of time.	[Q1] Is the allocation of revenue consistent with IFRS 17? [Q2] Is the allocation of revenue consistent with accepted actuarial practice in Canada?	If the issue is not resolved and management uses the “passage of time” despite it being significantly different that the expected pattern of release of risk, reporting with reservation may be appropriate.

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POP QUIZ ANSWERS

The AA must perform a valuation of the policy liabilities at year-end using AAP (Accepted Actuarial Practice).