The P&C Actuary's Role in Solvency Monitoring - Property and ...

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PACICC – The P&C Actuary’s Role in Solvency Monitoring Page 40 change in the environment and in the actuary’s assessment of the various considerations that influence the selection of the margin for adverse deviations, then a change may be justified. Dynamic Capital Adequacy Testing The work of the CIA on standards of practice for DCAT extends over many years. Two exposure drafts preceded the adoption of a final DCAT standard of practice by Council on December 14, 1998. The standard was effective for any DCAT work starting on January 1, 1999. With the publication of Dynamic Capital Adequacy Testing (DCAT SOP), the CIA finally had standards that addressed DCAT for both life and P&C insurance companies. Prior to December 1998, the previous dynamic solvency testing standard of practice only applied to life insurance companies. The DCAT SOP was applicable to an actuary’s work examining future financial condition if asked for by the regulators. At the time, it was expected that the regulators would start requiring P&C insurers to have DCAT analyses completed. In the cover memorandum of the DCAT standard of practice, it was noted that the “CIA will notify the federal and provincial regulators that the DCAT standard is effective January 1, 1999.” 75 The purpose of DCAT was set out in Sections 15 to 17 of the DCAT SOP: Dynamic capital adequacy testing examines the effect of various plausible adverse scenarios on the insurer’s forecasted capital adequacy. It is the actuary’s primary tool for investigation of an insurer’s financial condition. The purpose of dynamic capital adequacy testing is to identify plausible threats to satisfactory financial condition, actions which lessen the likelihood of those threats, and actions which would mitigate a threat if it materialized. Dynamic capital adequacy testing is defensive: it addresses threats to financial condition rather than the exploitation of opportunity. 76 Some of the issues addressed in the DCAT SOP included: ― Requirements for the determination of a satisfactory financial condition ― Length of the forecast period ― Base scenario ― Plausible adverse scenarios ― Integrated scenarios ― Ripple effects ― Reporting ― Opinion The CIA published an educational note on DCAT in January 1999, which was replaced in 2009 with a revised educational note. The DCAT SOP was repealed in 2003 when the consolidated standards of practice were adopted. DCAT is now addressed in a separate section (Section 2500) of the consolidated standards of practice. 75 DCAT, December 1998, cover note. 76 http://www.actuaries.ca/members/publications/1998/9870e.pdf, accessed November 2010.
PACICC – The P&C Actuary’s Role in Solvency Monitoring Page 41 Peer/External Review The subject of peer review was discussed for many years by the CIA leadership and membership. The following is from the September 1997 report titled Appointed Actuary Peer Review prepared by the CIA Working Group on Peer Review. The issue of peer review is one that has been debated among members for several years. In 1995, anticipation of changes to the compliance review process upon the adoption of consolidated standards of practice, and a specific desire to consider the implementation of peer review … Among the task force recommendations was one that: … Council encourage signing actuaries to have their work reviewed by another actuary member not involved with that work, and, as part of that encouragement, have guidelines developed for a process which the review would follow, and have ideas developed for ways providing access to a review for an actuary who needs help in finding someone to review his or her work. The OSFI, too, in its comments on the task force report and in other communications, has urged the CIA to implement peer review without delay. 77 It was six years later before changes in the CIA standards of practice were implemented. In response to the introduction of regulatory requirements for external review, also commonly referred to as peer review, the CIA revised Section 1640 of its standards of practice. “Section 1640 deals with how an actuary whose work is being reviewed and the reviewer treat each other. The main elements of the standard consider cooperation between the actuaries, reporting by the reviewer and dispute resolution.” 78 The revised Section 1640 became effective on September 1, 2003. An educational note, applicable to the reviews of an insurer’s AA reports (i.e., report on the policy liabilities valuation and DCAT report), was released by the CIA as a supplement to the revisions in the standards of practice. In the covering memorandum with the revised Section 1640, it was noted that the standard of practice and the educational note did not apply to reviews conducted as part of a quality control process within an actuary’s firm. 77 http://www.actuaries.ca/members/publications/1997/9746e.pdf, accessed November 2010. 78 http://www.actuaries.ca/members/publications/2003/203067e.pdf, accessed November 2010.
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