CIA (e)Bulletin/(e)Bulletin de l'ICA
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December 2016
 
 

Practice Council Update

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By Pierre Dionne, FCIA

This article provides updates on two recent Practice Council activities.

Timely Updates

Pension practitioners may have noticed a new type of announcement on October 21: a preliminary communication for Assumptions for Hypothetical Wind-Up and Solvency Valuations with Effective Dates on or after September 30, 2016. This communication is part of our continuous efforts to improve our service and relevance to members. It is intended to provide more timely updates around the discount rate and mortality recommendations for estimating the cost of purchasing annuities. This communication was published three weeks after quarter-end, and was eventually followed by an educational note supplement. In comparison, actuaries waited 40 days and 48 days for the educational note supplement at the end of the first and second quarters respectively. We hope the increased timeliness of the publication was useful. We are always open to comments, positive or constructive, so don’t hesitate to reach out to myself or to Simon Nelson, Chair of the Pension Plan Financial Reporting Committee.

DCAT and ORSA Integration

The Practice Council is currently engaged in a dialogue with both the Office of the Superintendent of Financial Institutions (OSFI) and the Autorité des marchés financiers (AMF) on streamlining the Dynamic Capital Adequacy Testing (DCAT) and the Own Risk Solvency Assessment (ORSA) processes. Indeed, upon a first quick look, both reports address risks faced by an insurance company and the amount of capital required to mitigate those risks. Both reports are ultimately presented to the board.

There are several significant differences between the two reports, including the following:

  • Level of guidance – CIA standards prescribe certain aspects of the DCAT (e.g., number of scenarios, definition of satisfactory financial condition, etc.) while ORSA has no requirements;
  • Scope – DCAT focuses on a capital sufficiency analysis relative to regulatory capital requirements, while ORSA is much broader from risk identification and assessment to its level of integration in the entire operations of the insurance entity, the approach of relating risk to capital, and the feedback loop into the decision-making process of senior management;
  • Ownership – DCAT is owned by the Appointed Actuary (as per the Insurance Companies Act the actuary must report on the financial condition of the insurance entity) while ORSA is owned by the board;
  • Opinion – It is required only for DCAT; and
  • Independence – The appointed actuary’s ownership of DCAT comes attached with the role’s independence from management. There is no such requirement for ORSA, other than a requirement for an independent review, which is also required for DCAT (external peer review).

These differences don’t mean that the two reports cannot be integrated. More specifically, it may be the DCAT report which is somehow integrated in the ORSA process. In particular, with regards to the scope, note that DCAT’s purpose of testing capital relative to regulatory requirements and identifying threats and mitigating actions is appropriate to the DCAT’s definition of a satisfactory condition. However, that definition is likely a narrow interpretation of satisfactory financial condition. Management’s ability to operationalize and manage the identification, assessment, quantification, and reporting of risk, and include it in its decision-making process, all of which are purposes of ORSA, must surely be factors to consider in reporting on a satisfactory financial condition.

Other weaknesses of DCAT include the fact that the adverse scenarios are dictated and tend to be static year-to-year, and that the recommendations, if any, may lack depth given the narrower approach taken with DCAT. On the other hand, having a signed opinion adds a level of credibility and assurance to a process or requirement due to the accountability that lies on the person signing. With an opinion, it is also more difficult to approach the requirement as a mere compliance exercise. It is to be expected that regulators will want to keep the opinion.

As we start meeting with regulators to discuss potential solutions, we will keep the membership apprised of our progress. Some solutions may require a change to our standards of practice. Stay tuned for more information.

My thanks to the DCAT/ORSA working group (Marco Fillion, Pierre Lepage, Larry Madge, and Leonard Pressey) for their analysis and for writing most of the above.

As usual, every member of the Practice Council remains available to discuss any issues you may have, either on the above two subjects or any other areas of actuarial practice. You can find the current list of Practice Council members and the list of committees and members, under the Organization tab of the members’ section of the CIA website.

Pierre Dionne, FCIA, is Chair of the Practice Council.

 

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