CIA.Valn

Reading: “Educational Note: 2023 Guidance to the Appointed Actuary for Property and Casualty Insurers”

Author: Canadian Institute of Actuaries (CIA)

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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An older version of this wiki article has been archived under the name CIA.Valn2022.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¹ This question is outdated because the IFRS 17 material from that reading has been removed from the syllabus.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

• AA should describe approaches and rationale used to develop the discount curve
• Ultimate risk free rate at October 15 2023 would remain at 3.65%

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.

Opening balances for 2022 and 2023

• Opening balances are required for both January 1 2023 and January 1 2022.
• AA would need to be fully comfortable with 2022 and 2023 opening balances to opine on the 2023 valuation.

Regulatory Guidance

• No full review required of all AA work for 2023
• Standardized stress test on inflation is required in 2023

mini BattleQuiz 1

Emerging Issues and Other Considerations

Section 6.1-6.4

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.

Recent Judicial, Legislative, and Political Events:

• Should consider any change to provincial or federal tax systems or rates (e.g. rate freeze 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.

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Section 6.5 - 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.

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

mini BattleQuiz 3

Full BattleQuiz You must be logged in or this will not work.

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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,...)