Actuarial Standards – International Convergence?

By Dave Pelletier, FCIA

As CIA President Simon Curtis reported in the November issue of the (e)Bulletin, the Council of the International Actuarial Association (IAA) recently adopted its first International Standard of Actuarial Practice. ISAP 1 is on the subject of general actuarial practice, dealing with many of the subjects covered by part 1000–General of our own Standards of Practice.

This may well raise a number of questions in readers’ minds:
Given the increasing importance of globalization (particularly given the increasing acceptance of International Financial Reporting Standards—IFRS—around the world and the work being done on those standards in the insurance and employee benefit areas) and professionalism, the IAA’s Professionalism Committee established its Convergence of Actuarial Standards Task Force (CTF) in 2010. It was chaired by Hillevi Mannonen of Finland, and included among its members our own David Congram. The CTF defined six different levels of "convergence", ranging from identical standards everywhere ("full convergence") to some standards in some places but covering different things and potentially conflicting ("no convergence").

"No convergence" is the current reality; however, the CTF concluded that this was not an acceptable option going forward. "Full convergence" was also considered unworkable, certainly at this stage or even in the "foreseeable future". Full convergence would have taken standard-setting power out of the hands of individual jurisdictions and placed it with a yet-to-be-established and hence totally untried and untested global actuarial standards-setter. Even the International Accounting Standards Board (IASB) is not in that position; some key countries (the U.S. and Japan being two) do not follow IFRS and even those that are "IFRS countries" have local accounting standards-setters (in Canada, the Accounting Standards Board, or AcSB) that consider what the IASB comes up with for adoption locally.

The CTF concluded then that the appropriate objective was "medium convergence with voluntary application", and recommended that the IAA should reflect this in its strategic direction. As a result, the IAA now includes as part of one of its strategic objectives, "Promote the development and issuance of actuarial standards in the jurisdictions of all Full Member Associations, and the global convergence of actuarial standards." It identified the preparation of model standards as a key activity designed to ultimately achieve this objective, and so established the tentatively-named Interim Actuarial Standards Subcommittee (IASSC) in late 2010.

ISAP 1 is the first such model standard produced as a result, reflecting some excellent work by the IASSC’s General Task Force, chaired by Godfrey Perrott of the U.S. with strong contribution by Canada’s Jacqueline Friedland. So, given "medium convergence with voluntary application", what will Canada and the other countries do with ISAP 1?

The situation with respect to actuarial standards varies hugely by country. Some have none. In others, they are essentially by-products of regulation of insurance and/or pensions. Others have some standards but they are limited to certain areas of practice. Others, like Canada, have extensive standards, but these vary considerably in format and in the nature of the bodies developing, approving, and adopting them.

Countries with no or limited standards may well be those that find it easiest to adopt ISAPs as they are developed, once they have put a standard adoption process in place. It’s trickier in places like Canada with already existing standards, and particularly Canada where our standards across practice areas tend to be closely integrated, unlike in some other jurisdictions where the various standards are somewhat more stand-alone.

As Simon Curtis pointed out in his November article, philosophically and strategically "the CIA has been a strong supporter of the need for a robust standard-setting capability, largely because we feel that this will position the actuarial profession globally to be a full participant with bodies such as the International Accounting Standards Board in the development of global practice in areas of interest to actuaries."

The ASB and its counterparts elsewhere that share the same view will want to demonstrate support for this international initiative. The ASB is currently considering how best to do this, and has established a working group, to be chaired by Michael Banks (not Jim Christie, as I mistakenly reported in the (e)Bulletin last month), to examine the various options available to the ASB for dealing with this and future ISAPs. One approach could be, in the words of the news release accompanying the issuance of ISAP 1, to confirm that our existing standards are "substantially consistent" with this ISAP and others as they come along, and to modify our existing standards if necessary to achieve that "substantial consistency". Our standards would be deemed substantially consistent with the ISAPs if work conforming to our standards would also conform to the ISAPs. However, as the body of ISAPs grows over time and as acceptability and credibility of the ISAPs grow, perhaps at some point in the (distant!) future, we’ll see a move away from our own standards to the body of ISAPs, in the same way that the AcSB in Canada adopted IFRS in 2011.

Member associations of the IAA appear to be gaining comfort with the process, given the sensible approach towards medium convergence with voluntary application and the strong support for the effort provided by the IAA Presidents and Council (including IAA President-Elect Rob Brown and David Congram) over the last three years. The IASSC was pleased that the IAA Council decided that, effective January 1, 2013, the IASSC would drop the "Interim" and the "Sub" and it is now the Actuarial Standards Committee (ASC). However, the process of actual adoption or certification of substantial consistency across the world could be a long one, and close and genuine consultation on the part of the ASC with the IAA’s member associations and other interested parties worldwide will play a key role in gaining acceptance for the ISAPs.

Dave Pelletier, FCIA, is Chair of the Actuarial Standards Board.