Difference between revisions of "CIA.Valn"
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Inflation is always a consideration when selecting assumptions but if the rate of inflation is constant, then the age-to-age factors in a standard reserving development method will account sufficiently for inflation. Inflation during 2022 however has increased significantly and may need to be dealt with explicitly in reserving assumptions. That said, an increase in CPI does not necessarily translate into a point for point increase in insurance loss costs. | Inflation is always a consideration when selecting assumptions but if the rate of inflation is constant, then the age-to-age factors in a standard reserving development method will account sufficiently for inflation. Inflation during 2022 however has increased significantly and may need to be dealt with explicitly in reserving assumptions. That said, an increase in CPI does not necessarily translate into a point for point increase in insurance loss costs. | ||
| + | |||
| + | <span style="font-size: 24px;">😄... </span> | ||
| + | Alice-the-Actuary and Ian-the-Intern were deep in a pile of loss triangles when Ian asked, “So if inflation suddenly spikes, can’t we just keep using the same reserving methods?” Alice rolled her eyes. “Ian, that’s like trying to measure your height with a rubber band. Long-tailed lines don’t adjust that fast — you’ve gotta bring out special tools like Berquist-Sherman.” Later, Ian triumphantly waved a CPI chart. “So reserves just follow this, right?” Alice nearly spit out her coffee: “Claims don’t care about grocery prices, Ian — talk to the adjusters, check the wage data, get real.” Finally, when Ian suggested recessions might actually be good for insurers (“fewer people driving, fewer accidents!”), Alice muttered: “And more fraud, more defaults, plus tanking investments. Kid, if recessions were good for us, I’d be cheering for them instead of losing sleep.” | ||
:{| class='wikitable' | :{| class='wikitable' | ||
| Line 137: | Line 140: | ||
:* Default on premium payments | :* Default on premium payments | ||
| − | + | When assessing macroeconomic risks, insurers should be mindful of several specific trends that can materially affect reserving practices. Rising pre-judgment interest (PJI) rates can increase settlement costs, while general inflation measures like the Consumer Price Index (CPI) may not align with actual loss cost inflation. Broader economic downturns such as recessions can pressure both sides of the balance sheet by altering policyholder behaviour and reducing asset values. In addition, shifts in crime trends—such as the recent surge in organized auto theft—can suddenly change the mix of claims in ways not reflected in historical development patterns. | |
| + | |||
| + | <span style="font-size: 24px;">😄... </span> | ||
| + | Alice-the-Actuary was racing down the highway (as usual) while explaining to Ian-the-Intern why her reserves were giving her heartburn. “Look, Ian,” she said, “if judges keep cranking up pre-judgment interest, my old case reserves are toast.” Ian, scribbling furiously, asked, “But isn’t inflation just the CPI?” Alice nearly swerved: “That’s like saying all fast food is salad — technically food, but not the same thing!” A week later, when the market tanked, Ian cheerfully noted that at least liabilities would go down too. Alice sighed: “No, kid — recessions hit both sides. More claims, less investment income. It’s like paying for speeding tickets with a declining stock portfolio.” And just as Ian thought he understood, the news broke about a wave of organized auto thefts. “See, Ian? Even crooks can wreck your triangles.” | ||
:{| class='wikitable' | :{| class='wikitable' | ||
| Line 143: | Line 149: | ||
|| '''Question''': Why might higher pre-judgment interest (PJI) rates cause insurers to understate reserves? | || '''Question''': Why might higher pre-judgment interest (PJI) rates cause insurers to understate reserves? | ||
|} | |} | ||
| + | |||
| + | :* Settlement costs rise when PJI increases | ||
| + | :* If case reserves don’t include higher rates, development factors understate costs | ||
| + | :* Greatest impact in litigation-sensitive lines | ||
:{| class='wikitable' | :{| class='wikitable' | ||
| Line 148: | Line 158: | ||
|| '''Question''': Why is the Consumer Price Index (CPI) not always a good measure for insurance loss cost inflation? | || '''Question''': Why is the Consumer Price Index (CPI) not always a good measure for insurance loss cost inflation? | ||
|} | |} | ||
| + | :* CPI reflects general prices, not insurance claims | ||
| + | :* Loss costs may diverge from CPI trends | ||
| + | :* Sole reliance risks misstating reserves | ||
:{| class='wikitable' | :{| class='wikitable' | ||
| Line 153: | Line 166: | ||
|| '''Question''': How can a recession affect both sides of an insurer’s balance sheet? | || '''Question''': How can a recession affect both sides of an insurer’s balance sheet? | ||
|} | |} | ||
| + | |||
| + | :* '''Liabilities''': reduced coverage, opportunistic fraud, more defaults/insolvencies | ||
| + | :* '''Assets''': lower investment values, interest rate swings, weaker returns | ||
:{| class='wikitable' | :{| class='wikitable' | ||
| Line 158: | Line 174: | ||
|| '''Question''': Why might rising organized auto theft make historical development patterns unreliable? | || '''Question''': Why might rising organized auto theft make historical development patterns unreliable? | ||
|} | |} | ||
| + | |||
| + | :* Claim mix shifts (e.g., more total losses, faster settlements) | ||
| + | :* Past age-to-age factors assume stable patterns, so sudden spikes distort reserve estimates | ||
[https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=Valn§ion=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 3]'''</span> | [https://battleactsmain.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=CIA&suffix=Valn§ion=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 3]'''</span> | ||
Latest revision as of 19:34, 22 August 2025
Reading: Educational Note: Guidance to the Appointed Actuary for Property and Casualty Insurers
Author: Canadian Institute of Actuaries (CIA)
BA Quick-Summary: Guidance to AA
|
Contents
Pop Quiz
- From the FCT reading, identify 7 common ripple effects, and 5 common management actions for adverse scenarios.
Study Tips
An older version of this wiki article has been archived under the name CIA.Valn2022.
This reading is updated every year because it highlights changes that have been made to other readings. For example, it mentions recent changes that were made to Financial Condition Testing but these were already discussed in detail in the wiki article CIA.FCT-1. This year's update is very minor.
If you check the BattleTable below, you'll see that the only available exam problem from this reading covered IFRS 17, but that was when there were no other IFRS 17 readings on the syllabus. Now there are 6 IFRS 17 readings on the syllabus and everything you need to know is available from those.
If there's going to be a question directly from this reading, I think it would most likely be from the section on macroeconomic effects.
Estimated study time: 5 minutes
BattleTable
reference part (a) part (b) part (c) part (d) E (2018.Fall #28) IFRS 17: 1
- actuarial liabilities
- 1 This question is outdated because the IFRS 17 material from that reading has been removed from the syllabus. The IFRS 17 material is now covered in much more detail in CIA.IFRS17. Even though the new reading covers the above question, it does so in a different way. That means the answer in the examiner's report is probably not relevant anymore. You should base your study of IFRS 17 on the new reading, CIA.IFRS17.
In Plain English!
Recent Guidance
There are some miscellaneous topics here, none of which are particularly important and I would just breeze through this section.
Discounting Considerations
- A CLIFR subcommittee is tasked with recalibrating CIA reference curve annually
- No change in reference curve parameters
Role of the Appointed Actuary
- Mostly similar to before, except the AA now has to prepare the valuation in accordance with IFRS rather than in accordance with accepted actuarial practice in Canada.
- AA needs to consider whether it is appropriate to disclose differences between booked and AAR numbers
IFRS17 restated opening balances
- Opening balances are required for first fiscal year of implementation and previous fiscal year
- AA would need to be fully comfortable with both opening balances
Regulatory Guidance
- Now allows AAs to adapt the AAR to their own purposes and audiences
- AAs need to be aware of climate risk management guideline concerning governance, integrated risk management, climate scenarios and stress testing, capital and liquidity adequacy, fair treatment of clients, and climate related financial risk disclosure
Emerging Issues and Other Considerations
Section 7.1-7.4
This section is very general in nature. Most of it is pretty obvious.
- Product Reforms:
- Actuaries assess the impact of legal changes, such as the transition to no-fault automobile insurance, on the valuation of insurance contract liabilities.
- Be aware of product reform in Alberta regarding the care first model
- Recent Judicial, Legislative, and Political Events:
- Should consider any change to provincial or federal tax systems or rates (e.g. rate freeze in Alberta)
- Be aware of Excess profit provision in Alberta
- Catastrophic Events: Here are 4 rather obvious things an actuary should do regarding catastrophic events...
- Consideration of post-event inflation's effect on non-catastrophic losses.
- Analysis of changes in future claims payments due to the event.
- Adjustments to Unallocated Loss Adjustment Expenses (ULAE) estimates.
- Review of risk adjustments.
The quiz questions relate to COVID-19, which isn't discussed in the current version of this reading. You can, however, think of it as a case study or an application of principles. I could see an exam question presenting you with a catastrophic scenario and then asking you for an interpretation.
Section 7.5 - Macroeconomic environment
Actuaries need to consider the impact of the macroeconomic environment on the claims, capital availability and investment results
Inflation is always a consideration when selecting assumptions but if the rate of inflation is constant, then the age-to-age factors in a standard reserving development method will account sufficiently for inflation. Inflation during 2022 however has increased significantly and may need to be dealt with explicitly in reserving assumptions. That said, an increase in CPI does not necessarily translate into a point for point increase in insurance loss costs.
😄... Alice-the-Actuary and Ian-the-Intern were deep in a pile of loss triangles when Ian asked, “So if inflation suddenly spikes, can’t we just keep using the same reserving methods?” Alice rolled her eyes. “Ian, that’s like trying to measure your height with a rubber band. Long-tailed lines don’t adjust that fast — you’ve gotta bring out special tools like Berquist-Sherman.” Later, Ian triumphantly waved a CPI chart. “So reserves just follow this, right?” Alice nearly spit out her coffee: “Claims don’t care about grocery prices, Ian — talk to the adjusters, check the wage data, get real.” Finally, when Ian suggested recessions might actually be good for insurers (“fewer people driving, fewer accidents!”), Alice muttered: “And more fraud, more defaults, plus tanking investments. Kid, if recessions were good for us, I’d be cheering for them instead of losing sleep.”
Question: What should an actuary do to properly incorporate inflation assumptions in a reserve analysis?
- consult with: underwriters, business analysts, fraud detection experts, claim adjusters
- (to understand whether inflation has transpired in claim payments, and is accounted for in case reserves)
- consult the CPI (Consumer Price Index)
- Consider techniques such as the Berquist-Sherman to adjust the LDFs.
- perform a sensitivity analysis (with varying inflation assumptions to assess the degree of sensitivity of reserve estimates to different assumptions)
Question: Briefly describe why the development method may not be appropriate for long-tailed lines with sudden changes in inflation.
- The effect of inflation on recent development periods may emerge more quickly for short-tailed lines but...
- ...more slowly for long-tailed lines.
Question: What are the possible impacts of a recession on policyholder behaviour?
- Potential reduction of coverage
- Opportunistic fraud
- Default on premium payments
When assessing macroeconomic risks, insurers should be mindful of several specific trends that can materially affect reserving practices. Rising pre-judgment interest (PJI) rates can increase settlement costs, while general inflation measures like the Consumer Price Index (CPI) may not align with actual loss cost inflation. Broader economic downturns such as recessions can pressure both sides of the balance sheet by altering policyholder behaviour and reducing asset values. In addition, shifts in crime trends—such as the recent surge in organized auto theft—can suddenly change the mix of claims in ways not reflected in historical development patterns.
😄... Alice-the-Actuary was racing down the highway (as usual) while explaining to Ian-the-Intern why her reserves were giving her heartburn. “Look, Ian,” she said, “if judges keep cranking up pre-judgment interest, my old case reserves are toast.” Ian, scribbling furiously, asked, “But isn’t inflation just the CPI?” Alice nearly swerved: “That’s like saying all fast food is salad — technically food, but not the same thing!” A week later, when the market tanked, Ian cheerfully noted that at least liabilities would go down too. Alice sighed: “No, kid — recessions hit both sides. More claims, less investment income. It’s like paying for speeding tickets with a declining stock portfolio.” And just as Ian thought he understood, the news broke about a wave of organized auto thefts. “See, Ian? Even crooks can wreck your triangles.”
Question: Why might higher pre-judgment interest (PJI) rates cause insurers to understate reserves?
- Settlement costs rise when PJI increases
- If case reserves don’t include higher rates, development factors understate costs
- Greatest impact in litigation-sensitive lines
Question: Why is the Consumer Price Index (CPI) not always a good measure for insurance loss cost inflation?
- CPI reflects general prices, not insurance claims
- Loss costs may diverge from CPI trends
- Sole reliance risks misstating reserves
Question: How can a recession affect both sides of an insurer’s balance sheet?
- Liabilities: reduced coverage, opportunistic fraud, more defaults/insolvencies
- Assets: lower investment values, interest rate swings, weaker returns
Question: Why might rising organized auto theft make historical development patterns unreliable?
- Claim mix shifts (e.g., more total losses, faster settlements)
- Past age-to-age factors assume stable patterns, so sudden spikes distort reserve estimates
Full BattleQuiz You must be logged in or this will not work.
POP QUIZ ANSWERS
- 7 common ripple effects:
higher LR (higher losses or operating costs) loss of ReIns post-event inflation forced sale or liquidation mix shift PH actions (PH = Policyholder) regulatory action
- 5 common management actions:
tighten U/W raise rates review reinsurance sell assets review mix (geography, limit,...)
