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A Time of Change

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By Bruce Langstroth, FCIA

These are interesting times.

The world economy has (depending on perspective) either emerged from or is still emerging from a financial crisis that is unique in its severity. Around the world, governments and regulators have responded to the financial crisis and the stresses that it placed on financial institutions by strengthening regulatory oversight and requirements. Driven in part by the financial crisis, perhaps, we’re seeing an unprecedented level of regulatory convergence. The frameworks for determining required capital (Minimum Continuing Capital and Surplus Requirement, or MCCSR, and Minimum Capital Test, or MCT) which have been relatively stable for many years are to be dramatically updated—and the changes will include expanded opportunities for using internal models in the determination of required capital. And, finally, the valuation standards we have been accustomed to for so many years are to be replaced by a new and different standard as described in IFRS 4.

More importantly, these are interesting times for the actuarial profession in general and the Practice Council in particular. What has been a time of relative stability is becoming a time of change.

Regulatory requirements are changing, both in terms of orientation (principles versus prescription) and in terms of substance. The Office of the Superintendent of Financial Institutions (OSFI) has recently introduced new or updated guidelines relating to the determination of internal capital targets (Guideline A-4), governance over the use of reinsurance (Guideline B-3), and stress testing (Guideline E-18), and has indicated that guidelines relating to new requirements such as Own Risk and Solvency Assessment are coming. Unlike guidelines of days gone by, these guidelines articulate principles rather than specific actions or requirements and leave it to the individual companies and (frequently) actuaries to determine the specifics of implementation.

In their traditional forms, the MCCSR and MCT formulas have been relatively mechanical and guidance has not been required to support work in this field. Permission to use internal models for determining capital for segregated funds led inevitably to the need for standards and guidance in relation to their use. Expected changes to the MCCSR and MCT formulas will provide expanded scope for the use of internal models.

The valuation framework described by the IFRS 4 Exposure Draft—and subsequent decisions made by the International Accounting Standards Board/Financial Accounting Standards Board (IASB/FASB) since its publication—is dramatically different than the framework employed in Canada today, and there will be many questions to be answered as the world moves to implement this standard in the coming years.

In this time of change, one may expect an increased demand for standards and guidance. The Practice Council plays an important role in providing professional guidance within Canada, as outlined in its Terms of Reference:

The Practice Council shall have such duties as may be prescribed to it by the Board, in accordance with the following purpose:

(a) to direct and manage the development of all practice-related material other than Standards of Practice, in all areas of actuarial practice;

(b) to adopt all practice-related material other than Standards of Practice, in all areas of actuarial practice;

(c) to provide interpretative opinions on all Standards of Practice and other practice-related material, in all areas of practice; and

(d) to monitor the work of other professional standard-setting bodies and provide comments on draft professional standards issued by these bodies, where appropriate.

The changes discussed above, and others that have yet to emerge, will dramatically change the landscape of actuarial practice within Canada. In some cases, new standards or changes to existing standards will be required. In many cases, new or updated guidance material will be required and the Practice Council and its committees and task forces will be very busy developing that material so that members can be prepared for the changes as they emerge.

Bruce Langstroth, FCIA, is Vice-Chair of the CIA Practice Council.

 

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