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November 2016
 
 

Actuarial Standards Board (ASB) Update

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By Ty Faulds, FCIA

ASB Membership

The ASB is very pleased to welcome Mario Marchand to our Board and to thank Conrad Ferguson for all his support over the last several years. The current membership of the ASB includes Stephen Cheng, Ty Faulds (Chair), Jacqueline Friedland, Alexis Gerbeau, Edward Gibson, Mario Marchand, Josephine Marks, Geoffrey Melbourne, Dave Oakden, Catherine Robertson, and Tony Williams, and on an ex officio basis—Pierre Dionne, the Chair of the Practice Council, and Michel Simard, Executive Director of the CIA. Please feel free to approach any of us with any suggestions or questions you might have.

General Initiatives

The ASB has a number of ongoing general initiatives.

General Standards

The designated group’s (DG) proposed revisions to the General Standards (chaired by Paul Della Penna) was extensively discussed at our August meeting. While the intent of the DG was not to propose any changes to the intent of the standards, there were extensive changes resulting in a significant reduction in the length of this part of the standards. This was largely the result of removing elements that seemed to be more related to professional conduct, elements more suited to educational notes, and elements more appropriately dealt with in the practice-specific standards.

In light of the extent of the changes being proposed, the ASB approached the practice committees to consider the potential impact of these changes to their practice-specific section of the standards and/or educational notes to better understand the potential implications of proceeding with the proposals. After reviewing this feedback, the DG plans to bring the exposure draft back to the December meeting of the ASB for possible release early in 2017.

The Use of Models

The comment period on the Second Exposure Draft for Standards of Practice ─ Use of Models ended on August 31, 2016. The DG chaired by Bob Howard is in the process of reviewing the comments made and plans to bring the final standards to the December meeting for the approval of the ASB.

Mortality Improvements

The Task Force on Mortality Improvement chaired by Alexis Gerbeau was notified of a potential delay in the Statistics Canada publication of 2013 deaths. They are currently considering possible other sources of data in order not to further delay the publication of their cross-sector report, while still assessing the implications of the slowing down of mortality improvement trends observed in the UK and the U.S.

In the meantime, the DG for life insurance mortality improvement chaired by Dominic Hains continues to make progress on potential changes to the structure of the margins for adverse deviation given the expected change in structure of improvement scales. The ASB will consider any implications for the other practice areas as the experience is reviewed.

Pension Initiatives

The comment period on the Notice of Intent – Revisions to Subsection 3260 of the Practice-Specific Standards for Pension Plans – Reporting: External User Report; Advice on the Funded Status or Funding of a Pension Plan ended on August 31, 2016. The DG chaired by Geoffrey Melbourne is considering the mixed feedback received on this initiative and plans to bring forward an exposure draft for any changes in the near future.

The comment period on the Notice of Intent to EstablishStandards of Practice in Respect of Calibration of Stochastic Models used for the Purposes of Certification of Pension Plan Funding Requirements (new Subsection 3270 Stochastic Modellingalso ended on August 31, 2016. In order to eliminate any possible perception of conflict of interest from the external public, Tony Williams has stepped back from involvement in this designated group. At our October meeting, the ASB appointed Todd Saulnier as the Chair of this DG. The ASB would like to thank Tony for all his efforts in getting this initiative to this point. The DG is reviewing the feedback received and is considering the plans needed to continue to move this initiative forward. This DG includes representation from the insurance practice area in order to appropriately consider consistency with similar standards in the life insurance-specific standards.

The DG, chaired by Gavin Benjamin, considering Amendments to Section 3500 of the Practice-Specific Standards for Pension Plans – Pension Commuted Values, continues to research and discuss the various challenges with a focus on the future structure of the discount rate and changes required for target benefit and shared risk plans. A second DG focused on assumptions underlying marriage breakdown capitalized costs is expected to start work after enough progress has been made on the pension side.

The DG, chaired by Catherine Robertson, to incorporate principles of International Standard of Actuarial Practice (ISAP) 3 – IAS 19 Employee Benefits into the Canadian Standards of Practice, now has its membership in place and is preparing a notice of intent.

Insurance Initiatives

The comment period on the Exposure Draft for Revisions to the Practice-Specific Standards for Insurance (Part 2000) ended on October 31, 2016. The DG, chaired by Josephine Marks, is in the process of reviewing the feedback and hopes to issue the resulting final standard early in 2017 in order to ease coordination with the other proposals underway.

As mentioned above, the DG chaired by Dominic Hains to Revise Mortality Improvement Rates and Associated Margins for Adverse Deviations within the Practice-Specific Standards on Insurance Contract Valuation: Life and Health (Accident and Sickness) Insurance (Subsection 2350) and the Accompanying Promulgation has had some data challenges emerge. The target was to have this initiative completed in time for the 2017 year-end valuation. Options in order to still meet this date are being considered.

The DG chaired by Stéphanie Fadous prepared a Notice of Intent to Review the Standards of Practice to Incorporate Changes Needed as a Result of the New Capital Standard that was approved at our October meeting and published on October 14, 2016 with a comment deadline of December 31, 2016. The Office of the Superintendent of Financial Institutions (OSFI) and l’Autorité des marchés financiers (AMF) have been working with the industry on a new capital standard for several years. This new standard will be effective from January 1, 2018.

The new capital standard will require changes to the Canadian actuarial Standards of Practice (SOP) to ensure that all references to capital in the SOP use terminology consistent with the new capital standard.

Under the new capital standard there is also a need to quantify the provisions for adverse deviations in insurance contract liabilities and to isolate best estimate cash flows. For future mortality improvement assumptions, the Standards of Practice only prescribe a minimum valuation basis. As a result, many combinations of best estimate assumptions and margins are possible for valuation purposes. The DG will consider whether changes are required to narrow this range for this purpose, or whether guidance in an educational note is more appropriate.

The continuation of the low interest rate environment has prompted the ASB to monitor these developments closely and it is working through a process to review research on these annually with the Committee on Life Insurance Financial Reporting (CLIFR). This involves reviewing and updating the calibration criteria for stochastic risk-free interest rates models and then determining any corresponding changes to the ultimate reinvestment rates. The process to routinely update this research is well underway and the ASB expects to review the findings and consider any changes to the Promulgations of the Maximum Net Credit Spread, Ultimate Reinvestment Rates, and Calibration Criteria for Stochastic Risk-Free Interest Rates in the Standards of Practice for the Valuation of Insurance Contract Liabilities: Life and Health Insurance early in 2017.

On a related subject, the Final Communication of a Promulgation of Calibration Criteria for Investment Returns Referenced in the Standards of Practice for the Valuation of Insurance Contract Liabilities: Life and Health (Accident and Sickness) Insurance (Subsection 2360(Equity Returns) was published on July 3, 2012. As part of our process to routinely review these at least every five years, CLIFR is completing the necessary research to consider any changes. The ASB expects to review the findings and consider any changes early in 2017.

International Developments

The ASB remains committed to converging to the ISAP and has made significant progress on a number of related projects in addition to the update on ISAP 3 above.

The comment period on the Revised Exposure Draft for Standards of Practice – Establishment of Social Security Practice-Specific Standards ended on September 30, 2016. The ASB discussed the feedback, including that from the Actuarial Standards Oversight Council, at its meeting in October. The DG chaired by Edward Gibson is considering this feedback and plans to bring a final standard to the December meeting for approval.

When considering convergence to ISAP 1 – General Actuarial Practice, the DG at the time concluded that the ED-proposed new subsection 1850 regarding peer review which mirrors provisions of ISAP 1 should not be implemented. The reasons for not pursuing were the following:

The ED proposed recommendation indicates that

The actuary should consider to what extent, if at all, it is appropriate for a report to be independently peer reviewed, in full or in part, prior to the delivery of the report.

While this does not expressly require any particular work to be peer reviewed, it strongly suggests that some work needs to be peer reviewed. As there are no criteria provided as to which work should be peer reviewed (and it is highly problematic that clear guidance could be developed as to which work does or does not need peer review), application of the provision is not practical. Also, inclusion of this provision opens the possibility of litigation when something goes wrong as to whether particular work should have been peer reviewed—again with no obvious criteria for determination.

The U.S. and UK practice standards do not currently reference peer review. As a result, maintaining this difference from ISAP 1 does not seem unreasonable pending future developments.

Recently the UK practice standards have introduced a new standard on the Review of Actuarial Work that has addressed a number of these concerns. The purpose of this standard is

To set out the responsibilities of all Members in relation to the application of Work Review, which may include Independent Peer Review, to promote the quality of Actuarial Work.

The ASB has asked that the DG on the review of Part 1000 look at integrating peer review into part 1000 of the standards in a way that is generally reflective of what the UK has done.

Ty Faulds, FCIA, is Chair of the Actuarial Standards Board.

 

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