Canadian Institute of Actuaries L’Institut canadien des actuaires 2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

PD-10 – AuG-43: Impact on Actuaries and Auditors David Oakden Office of the Superintendent of Financial Institutions Sept. 22, 2006 PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective Outline E – 15 Appointment Role and Duties Qualifications External Review AuG-43 vs ER Experience with ER PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective Appointment Not CEO, COO or CFO Notify OSFI in writing Directors may revoke appointment AA must submit letter explaining reasons New AA must review letter Minimal delay in appointing new AA OSFI meets with new AAs PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective Role and Duties Annual Valuation (AAR) Financial Condition (DCAT) Three years Include actual experience Report to Directors or Audit Committee Adverse Condition Report If necessary PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective Qualifications Canadian Experience 3 years in last 6 CPD up to date No Public Discipline AA Certificate (when applicable) OSFI expects AAs to meet the requirements of the current draft PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective External Review Introduced by OSFI in 2003 Enhance the reliance process Provide an independent check of the work of the appointed actuary Narrow the range of results Provide education for the AA PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective External Review Work to be Reviewed (P & C) AAR DCAT Scope of Review No detailed calculations Controls Procedures PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective External Review Qualifications of External Reviewer Same as AA Sufficient experience Related to business of company Independent Company AA May be External Auditor Must be pre-release OSFI prefers pre-release ERs PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective External Review Change Reviewers Every 6 years Can use same firm Report Written Description of agreed changes Current report Future report Unresolved Issues Available to Board/Audit Committee Available to OSFI PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

AuG-43 vs External Review Detailed calculations Results Controls No written report External Review No detailed calculations Procedures Assumptions Documentation DCAT PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective Experience With ERs OSFI has reviewed over 100 reports We found the process effective Almost all ERs contained suggestions which would improve the reports Some ERs identified significant noncompliance with standards/OSFI Memorandum ERs are written reports available to management, the Board and OSFI PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective ER Recommendations Improved descriptions of Company operations Case reserving practices Reinsurance program Improvements to exhibits Include prior year selected factors Better references to source data Unpaid Claims and Loss Ratio Analysis exhibit not completed correctly Include a summary exhibit for development PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

ER Recommendations (ct’d) Recommendations for additional exhibits Data reconciliation Gross and net development Reinsurance summary Rationale for PfAD selection Discounting Interest rate Too subjective Should be net of expenses Impact of change in methods should be disclosed In some cases provisions were not discounted PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

ER Recommendations (ct’d) PfADs Not within the range At low/high end of range with no justification Change from prior year is not explained Payment pattern Payment pattern not consistent with selected provisions Selected payment pattern not shown in report PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

ER Recommendations (ct’d) Claim liabilities Calculation errors were identified Selected method not shown in AAR Additional methods should be considered Some lines are not credible, should be combined or industry benchmark used Very conservative assumptions Paid and incurred tail factors are not consistent PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective

PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective External Review Strengthens and validates our reliance process Revised E–15 OSFI will revisit its E-15 requirements in the next couple of years to eliminate any areas of duplication with AuG-43 PD-10 - AuG-43: Impact on Actuaries and Auditors OSFI Perspective