Canadian Institute of Actuaries L’Institut canadien des actuaires 2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 PD-10 Impact of Aug 43 - An Actuarial Perspective

PD-10 – AuG-43: Impact on Actuaries and Auditors Jim Christie, FCIA, FCAS E PD-10 Impact of Aug 43 - An Actuarial Perspective

Major Impacts on Audit Process Strong presumption that External Auditor will have Actuarial Specialist on engagement team (§ 8) Independence considerations mean the Appointed Actuary cannot be the Actuarial Specialist (§ 53) Requires corroborative evidence as the principal evidence for the auditor’s use of the AA’s work (§ 53) PD-10 Impact of Aug 43 - An Actuarial Perspective

PD-10 Impact of Aug 43 - An Actuarial Perspective AuG 43 - Paragraph 4 The auditor's objective is to obtain sufficient appropriate evidence to provide reasonable assurance that the policy liabilities are reasonable within the context of the financial statements as a whole PD-10 Impact of Aug 43 - An Actuarial Perspective

PD-10 Impact of Aug 43 - An Actuarial Perspective AuG 43 - Paragraph 4 In addition to performing appropriate procedures to test the calculation of the policy liabilities, the auditor considers complexity and subjectivity of the policy liabilities, availability and reliability of data, nature and extent of assumptions required, and degree of uncertainty of future events PD-10 Impact of Aug 43 - An Actuarial Perspective

PD-10 Impact of Aug 43 - An Actuarial Perspective AuG 43 - Paragraph 4 Policy Liabilities are a point estimate rather than an estimated range Different actuaries are likely to arrive at different point estimates due to the inherent uncertainties and judgments required in making such estimates Estimates normally still within a reasonable range PD-10 Impact of Aug 43 - An Actuarial Perspective

PD-10 Impact of Aug 43 - An Actuarial Perspective AuG 43 - Paragraph 4 Differences between such estimates are not necessarily indicative of error, where the estimates are within a reasonable range The auditor will need to consider a zone of reasonableness within which to accept the policy liabilities as being reasonable within the context of the financial statements as a whole PD-10 Impact of Aug 43 - An Actuarial Perspective

Determination of a Reasonable Range Implies that the actuarial specialist will need to recalculate some policy liabilities Extent of recalculation will depend on nature of policy liabilities internal control processes (such as SOX 404 or CPAB 52 -109) Auditor determines extent to which recalculation is needed PD-10 Impact of Aug 43 - An Actuarial Perspective

Determination of a Reasonable Range AA still responsible for his/her point estimate BUT puts responsibility on External Auditor, with help of the Actuarial Specialist, to ensure the actuarial liabilities are materially correct in the financial statements PD-10 Impact of Aug 43 - An Actuarial Perspective

PD-10 Impact of Aug 43 - An Actuarial Perspective Implications Actuarial specialist will have to have access to company’s actuarial summary database virtually simultaneously with AA Actuarial specialist has to provide audit team with reasonable range of estimates PD-10 Impact of Aug 43 - An Actuarial Perspective

PD-10 Impact of Aug 43 - An Actuarial Perspective Issues Changes to Joint Policy Statement Duplication of effort between the audit and OSFI External Review processes CIA Practice Certificates for Actuarial Specialist may be required in 2008 PD-10 Impact of Aug 43 - An Actuarial Perspective

PD-10 Impact of Aug 43 - An Actuarial Perspective Issues No CIA guidance specifically for Actuarial Specialists Sufficient number of independent actuaries Impact of additional actuarial review on the audit fees There WILL BE additional effort required of Appointed Actuary PD-10 Impact of Aug 43 - An Actuarial Perspective

Possible Company Initiatives What can company do to reduce actuarial efforts needed? Strong internal controls will mitigate amount audit/actuarial review Thorough documentation of internal actuarial processes NOW Complete year end financial statements using actuarial support based on Q3 data PD-10 Impact of Aug 43 - An Actuarial Perspective

PD-10 Impact of Aug 43 - An Actuarial Perspective Questions Jim Christie 416-943-3468 jim.k.christie@ca.ey.com PD-10 Impact of Aug 43 - An Actuarial Perspective