CIA.Subseq

Reading: “Educational Note: Subsequent Events,” excluding Appendix B.

Authour: Canadian Institute of Actuaries (CIA)

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BA Quick-Summary: Subsequent Events Subsequent Event: An event of which an actuary first becomes aware after a calculation date but before the corresponding report date. Actuaries must assess the materiality of subsequent events, using the decision tree provided to determine whether the event should be reflected in the valuation or simply disclosed. Effective communication with auditors and management is critical, including clear documentation of the nature, financial impact, and treatment of subsequent events to ensure accurate financial reporting.

Pop Quiz

The concept of materiality is relevant in an analysis of subsequent events. State the definition of materiality. (You may not have covered the CIA reading on materiality yet. See CIA.Mat. If not, take an educated guess for the definition of materiality before looking at the answer to this Pop Quiz.)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• determine the actions the AA should take using the event decision tree

- all the different scenarios discussed in the paper have been asked on prior exams

• definition of subsequent event

Top Questions ← Questions you absolutely need to know!

Questions held out from Fall 2019 exam: #31. (Skip these now to have a fresh exam to practice on later. For links to these questions, see Exam Summaries.)

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #19)	CIA.FCT-1	CIA.FCT-1	(c) & (d) CIA.FCT-1	decision tree: (e) catastrophic event
E (2018.Fall #29)	define: - subsequent event	decision tree: - reinsurer failure - large loss
E (2018.Spring #25)	decision tree: - catastrophic event	decision tree: - change in markets	decision tree: - error in LDFs
E (2017.Fall #28)	decision tree: - catastrophic event	decision tree: - change in reserves
E (2017.Spring #27)	subsequent event: - when to account for	decision tree: - data error - winter storm - JUDICIAL DECISION
E (2016.Fall #28)	define: - subsequent event	decision tree: - missing claims - reinsurer failure - JUDICIAL DECISION
E (2016.Spring #28)	define: - subsequent event	decision tree: - catastrophic event
E (2014.Fall #32)	define: - subsequent event	decision tree: - change in markets
E (2013.Fall #35)	decision tree: - catastrophic event	decision tree: - missing claims	decision tree: - JUDICIAL DECISION
E (2012.Fall #34)	decision tree: - catastrophic event	decision tree: - missing claims	decision tree: - reinsurer failure

In Plain English!

Definitions

There are 6 definitions that you need to memorize:

term	definition
CalcDt (Calculation Date)	effective date of calculation (Ex: for financial statements, the calculation date would normally be the balance sheet date)
RptDt (Report Date)	date on which the actuary completes the report on his/her work
report	actuary's oral or written communication to users about his/her work
subsequent event	an event (of which an actuary first becomes aware) AFTER the CalcDt but BEFORE the corresponding RptDt
adjusting event	event (after CalcDt) that provides evidence of conditions existing (at CalcDt) (adjustments in calculations/reporting are required)
non-adjusting event	event (after CalcDt) indicative of conditions arising (after CalcDt) (adjustments to calculations/reporting are not required)

The most important definition is for subsequent event. This defn has been asked on (2016.Fall #28a), (2016.Spring #28a), (2014.Fall #32a)

Basically, if you find out about something potentially important AFTER you've got all your data, but BEFORE you publish your report, you're dealing with a subsequent event.

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Case Studies

There are 9 case studies related to subsequent events that are discussed in this reading. A typical exam question describes a real-world scenario in which the actuary is late in receiving potentially important information. You then have to use the event decision tree to determine what action the actuary should take. The scenario will be a variation on one of the 9 case studies. Here's a link the source text:

Event Decision Tree

All of the case studies refer to this decision tree and you will definitely need to know it for the exam.

EVENT DECISION TREE

I initially found the decision tree confusing. Here are a few observations that may make it clearer:

1. If the given event is not material then you can stop. (Take no action other than to disclose in notes to financial statements)
2. If the given event is material, then continue...
3. There are 3 branches: left, middle, right
4. The are 3 key dates: CalcDt, RptDt, and date of actuary's awareness of the event

if the actuary's awareness is..	you are on the..
BEFORE CalcDt (this is not a subsequent event)	left branch
BETWEEN CalcDt and RptDt (this is a subsequent event)	middle branch
AFTER RptDt (this is not a subsequent event)	right branch

Once you know which branch you're on, you have to figure out what action to take.

Possible Actions

There are only four actions that can be taken, regardless of which branch you're on:

nothing

inform

reflect

withdraw / amend

Here, inform means to 'inform only', for informational purposes, usually in the notes to the financial statements.

Case Study #1: Ice-Storm

The best way to explain the decision tree is to look at an example. The first example, or case study, given in the paper is about the Eastern Canada ice storm that occurred on Jan 5, 1998. I suggest you read through my abbreviated explanation below, then read section 6.1 in the paper. (It is detailed but well written.)

I've organized each case study into Facts, Branch, Action, Relevant Comments.

Facts:

event: Jan 5, 1998 (ice storm in Eastern Canada)

actuary became aware: Jan 5, 1998 (same day as event)

subsequent event? yes, actuary became aware after CalcDt & before RptDt (CalcDt = yr-end, "Awareness" date = Jan 5, RptDt is not specified, but assume later than Jan 5)

Branch: follow the middle branch in the decision tree (because it is a subsequent event - see table above)

Action: inform only (This action is based on a sequence of 4 questions that are discussed in the next section below.)

Relevant Comments:

• event doesn't make entity different retroactively
• purpose of work is to report on entity as it was
• but note that premium liabilities would have been understated

More Details on the Event Decision Tree

Left Branch

• This is the easiest case. It is not a subsequent event.

Action: reflect (always, provided the event has a material effect)

• (This is obvious! If the actuary is aware of an event BEFORE the calculation is done, the event must be reflected in the calculation.)

Middle Branch

• This is the most complicated case, and applies to the ice storm example above.
• There is a sequence of 4 questions that must be answered to determine the action.

Question	Answer →	action	Answer →	action
Error ? (was there an error?)	yes	reflect	no	go to next question
When ? (when did the event occur?)	on or before CalcDt	reflect	after CalcDt	go to next question
Different ? (did event make entity different? if not, stop)	yes, on or before CalcDt	reflect	yes, after CalcDt	go to next question
Purpose ? (what is the purpose of the work?)	report on entity as it will be	reflect	report on entity as it was	inform

• Trick for remembering these middle-branch questions: EWDP (Error / When / Different / Purpose)
• For the ice storm example, just ask yourself each question in turn:
  • was there an error? no, so go to next question
  • when did the event occur? after CalcDt, so go to next question
  • did the event make the entity different? yes, after CalcDt, so go to next question
  • what is the purpose of the work? report on entity as it was, so inform only

• Here are some practice problems related to the ice storm example.

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Right Branch

Question	Answer →	action	Answer →	action
Reflected ? (would event be reflected if it were a subsequent event?)	no	nothing	yes	go to next question
Invalidates ? (does the event invalidate the report?)	no	inform	yes	withdraw / amend

• Trick for remembering these right-branch questions: RI (Reflected / Invalidates) The right branch is not used very often. (See the case study from section 6.2, Judicial Decision, for an example of the right branch.)
• The most commonly used branch is the middle branch.

Case Study #6: Late Reported Claims

Let's apply the decision tree to determine the appropriate action for the late reported claims example. (This is another middle branch situation.)

Facts:

event: Nov 20 (case reserve increase by ceding insurer)

actuary became aware: Jan 12

subsequent event? yes, actuary became aware after CalcDt (12/31) & before RptDt (several weeks after Jan 12)

Branch: follow the middle branch in the decision tree (because it is a subsequent event)

Action: reflect only (This action is based on the sequence of 4 questions applicable to the middle branch of the decision tree.)

Error? no, go to next question

When? event occurred BEFORE CalcDt --> stop --> Final Action: reflect

Relevant Comments:

• this situation often arises for reinsurers
• it is NOT the same as a data error or missing claims

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Summary of the 9 Case Studies

Case Study	Brief Description	Actuary's Action
(6.1) Catastrophic Event	subsequent event (actuary's awareness of ice storm occurred AFTER CalcDt but BEFORE RptDt)	middle branch, EWDP-inform only (because purpose is to report on entity as it was)
(6.2) Judicial Decision	There are complications in this example that make it hard to give a brief description. For some insurers, the event (judicial decision revoking the Alberta $4,000 minor injury cap) occurred BEFORE their RptDt, and for some it occurred AFTER their RptDt. That means that for some insurers, this was a subsequent event, but for others, it wasn't. The former would use the middle branch of the decision tree; the latter, the right branch. You should definitely read over this example in the source text.	if on middle branch: EWD-reflect, if on right branch & material: RI-withdraw/amend, if on right branch & not material: no action
(6.3) Reinsurer Failure	subsequent event (actuary's awareness of reinsurer failure occurred AFTER CalcDt but BEFORE RptDt)	middle branch, EWD-reflect (because event indicated entity was different BEFORE CalcDt)
(6.4) Change in Markets	subsequent event (actuary's awareness of big drop in stock market AFTER CalcDt but BEFORE RptDt)	middle branch, EWDP-inform only (because purpose is to report on entity as it was)
(6.5) Missing Claims	subsequent event (actuary's awareness of missing claims AFTER CalcDt but BEFORE RptDt)	middle branch, E-reflect (because errors that make entity different BEFORE CalcDt must be corrected)
(6.6) Late Reported Claims	subsequent event (case reserve increase by ceding insurer not reported to reinsurer until AFTER CalcDt but BEFORE RptDt)	middle branch, EW-reflect (because event occurred BEFORE CalcDt)
(6.7) Change in Incurred Value of Large Loss	subsequent event (change in large loss from prior year reported after AFTER CalcDt but BEFORE RptDt)	see this forum post for an explanation!
(6.8) Change in Industry Benchmarks	subsequent event (new industry benchmarks released AFTER CalcDt but BEFORE RptDt)	middle branch, EWDP-inform only (because change not material and did NOT make entity different)
(6.9) Pandemic Events	subsequent event (Pandemic declared AFTER CalcDt but BEFORE RptDt)	middle branch, EWDP-inform only (because pandemic was mainly a forward-looking event and did NOT make entity different)

Judicial Decision BattleQuiz

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Reinsurer Failure and Change in Markets BattleQuiz

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Missing Claims and Change in Industry Benchmarks BattleQuiz

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Pandemic Events BattleQuiz

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What's in the rest of the reading?

This is a well-organized reading and has lots of useful information for the working actuary. For the purposes of this exam, however, it is too detailed. The points asked on this paper is trending upwards, but they are mainly interpretive questions that require an understanding of the decision tree and the case studies.

TRICK: You can probably get most of the points for any question on this topic by knowing the following:

• definition of subsequent event
• how to navigate the decision tree

Now, it's also helpful to have gone through a few of the 9 case studies, but if you take a step back, most of these case studies are common sense. If you are running short on study time then DON'T spend a long time on this paper. If you know the basics and take an educated guess, you should do ok.

More old exam problems

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BattleCodes

Memorize:

• definitions: calculation date (CalcDt), report date (RptDt), report, subsequent event, adjusting event, non-adjusting event
• Decision Tree:
  • what are the 3 branches of the subsequent event decision tree?
  • what are the 4 possible actions that the actuary can take?
  • what are the relevant questions in each branch of the decision tree?

Conceptual:

• Case Studies: you should be at least somewhat familiar with the 9 case studies
  • Often, you can make an educated guess for a question on subsequent events, even if you don't remember the relevant case study.
  • This reading is largely common sense.

Calculational:

• none

Historically, you could expect 1.0 - 1.5 pts on subsequent events, but it has been trending upwards in recent sittings. The text provides a lot of detail for the case studies, but if you step back, they are mostly common sense. Even if you hadn't read the case studies, and the only thing you knew from this paper was the definition of subsequent event, I bet you could take a pretty good guess on the required action in a given situation.

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POP QUIZ ANSWERS

defn of materiality: an omission / under-statement / over-statement is material if the actuary expects it to materially affect the user's decision-making or reasonable expectations.

Note 1: This is the definition given in the CIA reading on materiality, but it isn't a good definition because it uses the term it is trying to define!!

Note 2: My intuitive understanding of a material item is something that could potentially change the user's decision. (It isn't a hard concept.)