CIA.Valn

This reading summarizes a lot of important information regarding duties of an AA that is covered in more detail in other readings. In terms of exam questions, there is very little here that you can't get by thoroughly studying the other parts of the syllabus that relate to AA duties. EXCEPTIONS: Current/Emerging Issues. (This is not discussed elsewhere.)   Forum

Pop Quiz

• From the DCAT reading, identify 7 common ripple effects, and 5 common management actions for adverse scenarios. (We'll refer to these in this article)

Keywords

appointed actuary, emerging issues

In Plain English!

Intro

As mentioned in the summary, this reading concerns best practices for the appointed actuary when performing a valuation of reserves. Much of it is duplicated in other syllabus readings, so my suggestion is to scan the text for material that is not covered elsewhere. Sections 7 & 9 look like good sections to study:

Section 7: IFRS 17 This was asked here: E (2018.Fall #28)

Section 9: Current & Emerging Issues

This is an example of a reading that covers many topics but not in very much detail. It isn't realistic to learn everything because it's been so lightly tested. My recommendation is that you take an educated guess as to what might be asked then learn those topics. I've made notes below on what I think might be good questions but you should spend at least a little time with the source reading because you might have a different opinion on what's important.

Section 7: IFRS 17

IFRS 17 is a BFD. I'm not sure why it's buried in a deep, dark corner of the syllabus because it's going to have a significant impact on actuarial work. IFRS 17 will replace IFRS 4 on January 1, 2021. Let's start by covering question #28 from the 2018.Fall Exam. This was one of the 3 worst done questions on the exam, and I think there's a good chance something from this section will appear again.

Question: how will IFRS 17 affect the valuation of actuarial liabilities when it replaces IFRS 4 on January 1, 2021

The answer is in a bullet point list directly from the source reading. There are 5 points but each is quite long. What you and I have to do is condense each point down to a simple phrase. The model answer in examiner's report is much shorter than the explanation given in the reading. The first thing I did was write down 1 word that represents each bullet point:

• Aggregation
• Measurement
• Discounting
• Risk adjustment
• Reporting

Next you need a memory trick to for these 5 points. To do this, I rearranged these 5 points as shown below. The first letter of each point spells DRAM-R. (In my mind, I hear this as drammer which sounds a little like drummer. So what I commit to memory is drummer, then I can figure out the rest.) The last thing to do is write a phrase that explain each of these points concisely.

Discounting:

- use a yield curve instead of a single discount rate (and no more PfAD for interest/discount rate → risk adjustment for financial risk is implicitly included in yield curve)

Risk adjustment:

- adjust PV(future cash flows) for uncertainty in amount & timing related to non-financial risk (likely different from existing PfAD)

Aggregation:

- create portolios of similar risks that are managed together: onerous risks, non-onerous risks, remaining risks

Measurement:

- may use PAA (Premium Allocation Approach) for measuring remaining liabilities (PAA is a simplified version of BBA, Building Block Approach, and can only be used under certain conditions)

  –

Reporting:

- carrying amounts for 4 groups must be shown separately in financial statements:

• insurance contracts that are assets
• insurance contracts that are liabilities
• reinsurance contracts that are assets
• reinsurance contracts that are liabilities

You needed to know 3 of these bullet points to answer #28 on the 2018.Fall exam. The accepted answers had less detail than in the source reading but I don't know if you'll need to know more than that for future exams. It's probably a good idea to at least glance at the actual reading.

Something that seems important in understanding the Discounting point above is:

Question: what is a yield curve

• a yield curve is a function relating yield of fixed-interest securities to the length of time to maturity.

In other words, the yield varies over the lifetime of the security. (Contrast this with using a single discount rate to calculate present value.)

The source reading states that insurers have a lot of work to do to be in compliance, and that they should be reading by the end of 2019 even though the official implementation date for IFRS 17 isn't until Jan 1, 2021.

Section 9: Current or Emerging Issues

The actuary should be aware of current or emerging issues because these must be taken into account when doing a valuation of reserves. Issues discussed in this reading include:

• Auto reforms
• Taxes
• Judicial / Legislative / Political
• Catastrophes

Of these issues, I recommend focusing on Ontario auto reforms and the Fort McMurray wildfires

Ontario Auto Reforms

This section on auto reforms is almost entirely about Ontario. This is an important issue because auto insurance is much more expensive in Ontario than in other provinces. Highlights include:

• Changes to SABS (Statutory Accident Benefits Schedule): medical benefits reduced,...
• Amendments to FSCO regulation 664: mandatory winter tire discount,...
• Amendments to Insurance Act regulation 461/96: increase tort deductible,...

The reforms are aimed at lowering costs for consumers through benefits reductions, discounts, increased deductibles,...

I can't imagine that the exam committee wants you to memorize specific changes to regulations. But then you must ask yourself why this reading is on the syllabus, and what kinds of exam questions might appear.

Reason for being on syllabus: You should be aware that performing a valuation (or reserve analysis) is not simply about applying cookie-cutter methods. If it were, a computer could do it. The value of the actuary is in considering factors that don't fit neatly into formulas. For example, how would you change your LDF selections or trend picks based on these changes to Ontario auto regulations. It's a difficult and interesting question.

• Question: Briefly describe the impact of Ontario auto reform, and suggest an appropriate course of action for the actuary.
• Answer: The intended impact is lower claims costs and lower rates. For pricing, the actuary might adjust severity trends downwards to reflect expected lower claim costs. For reserving, the actuary might adjust claims data corresponding to dates prior to reform. This would be to put historical data on the same "basis" as the post-reform data.

Fort McMurray Wildfires

This may be the costliest disaster in Canadian history. Obviously, it will have an enormous impact on people's lives. It will also be a major consideration for affected insurers.

This is a case where the actuary needs to work very closely with claims adjusters. (The claims adjusters have direct information about the physical devastation and the impact on people's lives.)

• Question: Briefly describe the impact of the Fort McMurray wildfires, and suggest an appropriate course of action for the actuary.
• Answer: Think back to the DCAT reading. The wildfires aren't DCAT adverse scenarios - they've actually happened, but the DCAT reading taught us about ripple effects and management actions, both of which are relevant here. We'll also add actuary's actions into our answer.

direct effect of catastrophe:	The most direct effect is obviously large claims payouts. This will produce a shock to the data triangles.
ripple effects:	This includes possible loss of reinsurance and post-event inflation. Post-event inflation may be triggered for anything from food, water, and lodging, to building materials to rebuild communities that were destroyed. Renewal of reinsurance treaties will also likely be affected - either non-renewed or given a substantial rate hike.
management/actuary action:	Large claim payouts may cause a rate increase for customers. Reinsurance options would also have to be reviewed. The actuary may have to make adjustments to the data, LDF selections, and trend picks.

BattleCodes

• Memorize:
  • nothing

• Conceptual:
  • Just make sure you understand that the actuary needs to be aware of specific events that may impact actuarial methodology.
  • If you read through this wiki article, you'll be should be reasonably well-prepared (for a reasonable question! CAS exam questions are not always reasonable!)

• Calculational:
  • none

• Final Words: There is only a low probability that a question from this reading will appear on the exam.

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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,...)