OSFI.MemoAA

Reading: “Property and Casualty - Memorandum to the Appointed Actuary,” 2023.

Author: OSFI (Office of the Superintendent of Financial Institutions Canada)

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BA Quick-Summary: Memorandum to the AA The memorandum outlines the required components of the Appointed Actuary’s Report (AAR) under IFRS 17, including documentation of methods, assumptions, and judgment used in valuing insurance liabilities. Actuaries must submit supplementary tables alongside the AAR, with strict filing deadlines to avoid penalties. The memorandum provides guidance on the transition from IFRS 4 to IFRS 17, requiring actuaries to disclose the methods and assumptions used in the transition, including any changes in discount rates, risk adjustments, and contract boundaries.

Study Tips

Use this wiki article as a reference but it's not a very interesting read! Ugh!

Much of the content of this reading is discussed in other readings pertaining the appointed actuary. As such, this reading might be a good review. It is long and detailed and there doesn't seem to be much testable material that hasn't already been covered elsewhere. If you completely skipped this reading, I honestly don't know if it would matter. (Just my guess.)

• It might be a good idea to do the quizzes.
• Pay special attention to the multiple choice questions on section 6 - there are 50 multiple choice questions spread over 4 Battle Cards within quiz #3.

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

BattleTable

No past exam questions are available for this reading.

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

In Plain English!

Section 1 - OVERVIEW

The Office of the Superintendent of Financial Institutions (OSFI) outlines requirements for the Appointed Actuary’s Report (AAR) under the Insurance Companies Act (ICA). The AAR is a detailed actuarial report given to regulators, discussing the suitability of actuarial and other policy liabilities in financial statements. It includes the actuary's opinion, backed by data and calculations. The report serves regulators, OSFI's actuaries and the insurer's management.

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Section 2 - GENERALLY ACCEPTED ACTUARIAL PRACTICE

Both the ICA and Guideline E-15 require the work of the AA to be in accordance with accepted actuarial practice. This fundamental requirement underpins all aspects of the appointed actuary's work. OSFI defines accepted actuarial practice as being embodied by Standards of Practice promulgated by the Actuarial Standards Board, supplemented by educational notes issued by the CIA. It's crucial to understand that educational notes are not exhaustive descriptions of accepted actuarial practice. Therefore, an AA's practice doesn't necessarily fall outside accepted practice solely because it isn't described in an educational note. The 2024 memorandum explicitly states that it contains no requirements that override or limit accepted actuarial practice in Canada. When AAs deviate from accepted practice or the memorandum's requirements, they must clearly identify and provide justification for such deviations.

Section 3 - OSFI'S REVIEW PROCESS

OSFI views the AAR as a critical input in assessing an insurer's financial resilience. The review process is thorough and may extend beyond initial filing. Upon reviewing the filed annual return and AAR, OSFI might decide to conduct further review and could request supplemental detail from the AA. The regulator reserves the right to reject assumptions or methods and request re-calculation using alternative approaches. The potential outcomes of OSFI's review are significant. Depending on findings, OSFI could require the AA to amend and re-file the AAR and annual return, reflect required changes in subsequent filings, or even require review from an independent actuary. OSFI expects the AA to respond promptly to all requests related to the AAR and annual return. This expectation of responsiveness underscores the collaborative nature of the regulatory review process.

Section 4 - REQUIRED CONTENTS OF THE AAR

The memorandum specifies comprehensive requirements for the AAR's contents, organized into major categories that ensure completeness and consistency across submissions.

4.1 Table of Contents

A well-structured table of contents serves dual purposes in the AAR. First, it provides users with an overview of the report's contents and organization, which is particularly valuable when extended to include major section headings. Second, it facilitates efficient navigation for users seeking specific information. The importance of a comprehensive table of contents cannot be overstated given the technical complexity and length of most AARs.

4.2 Identification of the AA and Peer Review Actuary

The AA should disclose whether they are an employee of the insurer or a consultant. This section must also identify:

• The duration for which they have served as AA
• Confirmation of compliance with continuing education requirements
• The peer reviewer's identity and employer
• The tenure of the peer reviewer with the insurer

This transparency helps establish the credibility and independence of the actuarial work performed.

4.3 Materiality

The AA must describe the materiality standard applied in their work and explain how they determined that amount. A critical requirement is comparing the AA's materiality to the external audit materiality, ensuring alignment between actuarial and audit perspectives on what constitutes material differences.

4.4 Expression of Opinion

The expression of opinion represents the core attestation of the AA's work. The AA should use the format specified in the CIA Standards of Practice, practice-specific standards for insurers. Any variation from this prescribed wording is considered a qualified opinion by OSFI. Key requirements for the opinion section include:

• The AA's signature (which can be electronic)
• The name of the AA (typed)
• The date of signing
• Alignment with opinions presented to shareholders and policyholders

For branches where the external auditor report isn't available when the AA renders their opinion, a qualified opinion conditional upon receiving an unqualified external auditor opinion must be issued.

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4.5 Changes That Influenced the Valuation

This critical section requires the AA to identify and describe various changes affecting the valuation. The scope is broad, encompassing changes in the external or internal environment, assumptions and methods, and other factors. Changes could involve:

• Policies and strategies
• Operations and business model
• Leadership and organizational structure
• Lines of business
• Underwriting and claims processes

Specific areas requiring discussion where applicable include significant transactions or changes in reinsurance arrangements, investment strategy (particularly where discount rates use own assets as reference), changes in accounting policies, and policies relating to dividends and par block management for life insurers.

4.6 Product

The AA must identify major product lines and describe their significant characteristics. The level of detail should reflect the complexity and uniqueness of products. For instance, a life insurer's AA might provide extensive details for segregated fund or universal life products while being more concise about standard renewable term insurance. Similarly, P&C insurers might focus more on emerging cyber coverages than traditional home and auto lines.

4.7 Reinsurance Held

4.7.1 Reinsurance Arrangements

The AA must provide comprehensive descriptions of the insurer's reinsurance held, including:

• Types of reinsurance
• Products and key risks covered
• Amount of risk ceded and coverage limits
• Accounting standard applicable
• Back-to-back reinsurance contracts

Significant reinsurance arrangements require particular attention - these are arrangements where either significant risk is transferred or significant assets/liabilities are carried. The AA must also discuss arrangements that don't cede insurance risk, unregistered reinsurance, related party arrangements, and internal reinsurance within corporate groups.

4.7.2 Accounting for Reinsurance Held Assets and Liabilities under IFRS 17

This section requires detailed description of reinsurance valuation, with particular focus on:

• Provisions for non-performance risk
• Embedded guarantees in funds withheld arrangements
• Aggregate treaties (stop loss, catastrophe, etc.)
• Differences from direct contracts in discount rates, risk adjustment, and other valuation elements

4.7.3 Other IFRSs

For reinsurance not accounted for under IFRS 17, the AA must identify the arrangements and describe how associated assets and liabilities are determined, including identification of applicable accounting standards.

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4.8 Data

The data section must describe the information used for valuation and notable year-over-year changes. Requirements vary by insurer type but share common themes of transparency and control. For P&C insurers, details must cover treatment of salvage and subrogation, loss adjustment expenses, and reinsurance in claims data. Life insurers must describe the basis for disability payment reductions related to government pension plans. Mortgage insurers need to detail cure and recovery treatment, loss adjustment expenses, and macroeconomic variables. The AA should describe the controls used to provide assurance over the adequacy of the data used in the valuation. This includes describing the extent to which the AA considers the external auditor's work and any instances where they don't rely on it.

4.9 Actual and Expected Experience

This section requires comparisons of actual to expected experience for significant assumptions used in measuring actuarial and policy liabilities. OSFI expects these comparisons to cover sufficient periods - ideally ten years for P&C and mortgage insurers and five years for life insurers. If data for these periods isn't available, the AA must explain the rationale for shorter periods and work toward meeting expectations.

4.9.1 Life Insurers

Life insurers must discuss actual versus expected experience for significant assumptions like mortality and policyholder behaviour, providing sufficient detail to demonstrate the reasonableness of current assumptions.

4.9.2 P&C and Mortgage Insurers

For P&C and mortgage insurers, comparison involves analyzing ultimate undiscounted loss estimates at current year-end versus prior year-ends. Analysis must be conducted by accident year and line of business. Key discussion points include:

• Reasons for significant differences between estimates
• Changes in methods or assumptions to minimize future development
• Material differences between loss development in returns versus AAR comparisons
• Quantification of differences in various exhibits

4.10 Methodology

The methodology section requires comprehensive disclosure of approaches used in the valuation. Key requirements include:

• Identification of major accounting choices deviating from industry norms
• Description of major estimation methods (development, expected, Bornhuetter-Ferguson for P&C; seriatim projections for life)
• Discussion of probability-weighted cash flow determination methods
• Description of discount rate construction and application
• Explanation of risk adjustment determination and confidence levels
• Details on insurer discretion in products like participating policies

For life insurers, additional requirements cover dividend determination, smooth mechanisms, valuation fund mapping for segregated funds, and bulk reserve determination.

4.11 Assumptions

The AAR should contain a description of key assumptions and how they are derived. This includes discussing the use of insurer data versus industry data, the review cycle for assumptions, and significant year-over-year changes with supporting rationale. The level of detail should reflect the materiality and complexity of each assumption.

4.12 Reliance on the Work of Others

AAs frequently rely on others' work in conducting valuations. Common areas include:

• External auditor for data validation
• Other AAs for pool valuations (e.g., Facility Association)
• External auditor for IFRS 17 accounting choices
• Other employees for non-actuarial assumptions (e.g., discount rates)

The AA must identify and describe significant reliances, expressly indicate acceptance of work performed by others, and note any reservations associated with that reliance.

4.13 Table of Exhibits and Appendices

Similar to the main table of contents, this table presents the organization and location of quantitative analyses comprising the valuation, providing crucial navigation assistance for technical users.

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Section 5 - ACTUARIAL CALCULATIONS SUPPORTING REGULATORY CAPITAL TESTS

For P&C and mortgage insurers, the memorandum requires specific support for regulatory capital calculations. The AA must provide information used to calculate and complete returns for the minimum capital test (MCT), branch adequacy of assets test (BAAT), or mortgage insurer capital adequacy test (MICAT). The AA should describe the information provided and details on how those amounts were determined. Appendices II and III of the memorandum provide detailed lists of required data elements, including various liability and asset measures, duration calculations, and risk adjustments by class of insurance.

Appendix I - FILING DIRECTIONS

The memorandum provides specific filing requirements and timelines that must be strictly followed:

Filing Timelines

• AAR and supplementary tables: within 60 days of fiscal year-end
• FCT report: earlier of 30 days after board presentation or one year after fiscal year-end
• Pre-release peer reviews: follow same timelines as material reviewed
• Post-release AAR peer reviews: within 30 days of AAR release
• Post-release FCT peer reviews: by December 31

Filing Procedures

All reports must be filed electronically via the Regulatory Reporting System (RRS). Key requirements include:

• Include signed expression of opinion in submission
• Convert to PDF format (not scanned)
• No security protection on files
• Follow specified file naming conventions
• No email submissions for security reasons

Failure to meet filing deadlines could result in penalty fees under OSFI's Late and Erroneous Filing Penalty Framework.

Special Requirements

The ICA requires filing the complete AAR with the Annual Return - OSFI will not accept a certificate containing only the opinion Insurers must complete and submit supplementary tables via RRS simultaneously with the AAR and FCT reports P&C and mortgage insurers must submit the UCLRE via RRS with the AAR

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