CIA Annual Meeting  Assemblée annuelle de l’ICA
CIA Annual Meeting
Assemblée annuelle de l’ICA
June 29 & 30, 2006  Les 29 et 30 juin 2006
Ottawa, Ontario
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Today’s Session
1. New Life Actuary MCCSR Opinion (Denis Ricard)
2. Revised DCAT Education Note & SOP (Wally Bridel &
Isabelle Perigny)
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
CIA Risk and Capital Committee
MCCSR / TAAM certification
•by Denis Ricard
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Background information
MCCSR/TAAM has evolved => more interpretation or
technical calculations
OSFI
– Looking for increased certification
– Has asked the CIA to look at a formal certification
Support by:
– CIA Board
– AA committee
– Committee on Risk Management and Capital
Lead to increase in role of AA
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Committee on Risk Management and Capital
• The committee has developed a new MCCSR certification
standard and an accompanying educational note
• The new standard and the educational note have been
approved by the Committee on Risk Management and
Capital
• Exposure draft sent to members in Nov 2005
• Few comments by CIA members
• Revised document approved by PSC May 17th 2006
• Effective for fiscal year 2006
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Opinion
Actual opinion:
"I confirm that I have read the relevant guideline and annual
return reporting instructions issued by the Office of the
Superintendent of Financial Institutions and that this form is
completed in accordance with them"
• Annual opinion: must be signed by the AA and one officer
• Quarterly: requires signature of a company officer
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Opinion
New additional annual opinion by the actuary:
2480 Certification of regulatory capital filing
.06 I have reviewed the calculation of the Minimum Continuing
Capital and Surplus Requirement ratios of [Company
name] as at [Date]. In my opinion, the calculation of the
components of the required and available capital has been
determined in accordance with the regulatory guidelines,
and the components of the calculation requiring discretion
were determined using methodologies and judgment
appropriate to the circumstances of the company.
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Opinion
New additional annual opinion by the actuary:
2480 Certification of regulatory capital filing
.06 For Test of Adequacy of Assets in Canada and Margin
Requirements form filings “Minimum Continuing Capital
and Surplus Requirement ratios”, and “required and
available capital” are replaced by “Test of adequacy of
margin”, and “required and available margin”.
For filings for provincially regulated companies, the ratio
definition and definitions of required and available
resources should be amended to reflect the appropriate
definitions in the provincial requirements.
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Opinion
New additional annual opinion by the actuary:
2480 Certification of regulatory capital filing
.01 This subsection applies to the AA of a life insurer when
giving an opinion on the appropriateness of capital
requirement calculations pursuant to law.
.02 The certification should contain an opinion signed by the
actuary.
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Opinion
New additional annual opinion by the actuary:
2480 Certification of regulatory capital filing
.03 The actuary should prepare a memorandum to support the
opinion that outlines the areas where the calculation
required discretion or significant technical calculations,
and the methodologies and judgments that were applied.
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Opinion
New additional annual opinion by the actuary:
2480 Certification of regulatory capital filing
.05 the actuary is not opining on whether the underlying
factors or specified methods to be followed are
appropriate but rather on the appropriateness of any
interpretation and discretionary technical calculations
and methods with respect to such guidelines.
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Educational note
Provide guidance:
• Appropriate practice
• Documentation in memorandum
• How to interpret the guidelines
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Educational note - Memorandum
• Support of the Opinion
• Areas where the AA has applied material judgement or
performed technical calculations
• Outline specific issues, explain the interpretation and the
underlying rationale
• Not intended to be long and detailed (high level)
• Prepared as a note to file from the appointed actuary
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Educational note
Examples of areas of interpretation:
• risk pass-through
– participating insurance
– index-linked products
• seg fund guarantees
• new mortality risk formula
• reinsurance
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
CIA Risk and Capital Committee
DCAT
• Wally Bridel
• Isabelle Périgny
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Overview of Session
• Background and reasons for updating the
DCAT Ed Note
• Changes to Ed Note
• Changes to Standards of Practice
• P&C Risk Categories
• Life Risk Categories
• Next steps
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Background
• Review of DCAT Ed Note initiated by PCFRC in
2003
• Life representation from RMCR committee began in
summer 2004
• Joint effort between PCFRC and RMCR
• Consensus of opinion between CIA, OSFI, AMF,
Assuris (formerly CompCorp)
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Reasons for Updating the Ed Note
• Update DCAT Ed Note to be consistent with current
SoP
• Update for changes in the regulatory capital measures
for P&C companies
• Add emphasis on risk management and presentation
to the Board
• Incorporate feedback from DCAT survey
• Reflect current best practices
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
DCAT Survey
• Objective of DCAT: about 75% mentioned risk
management information to Board or Chief Agent
• 50% receive 0-2 comments/questions from Board
• More than 80% of actuaries felt DCAT was effective
for analyzing risks to the company, but
• About 40% of actuaries believe that management sees
little or no value
• Also received views on key elements of a useful
DCAT report/presentation
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Outline of Revised Ed Note
Preface
I. Introduction
II. Method
III. Modeling
IV. Reporting
Appendix A - Regulatory capital requirements
Appendix B - Life Risk Categories
Appendix C - P&C Risk Categories
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
The Heart of the Ed Note
The Method section describes the process that would,
generally, be followed in conducting the DCAT analysis
•
•
•
•
Review of recent operations
Develop base scenario
Examine and identify risk categories
Develop plausible adverse scenarios
–Key scenarios and ripple effects
–Stress testing
–Integrated scenarios
• Possible management actions
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
The Heart of the Ed Note
The Modeling section discusses the considerations in
building and testing the model to be used in the DCAT
analysis
• Validating modeled financial information to actual
financial results
• Validating year to year flow under the base scenario
• Reasonableness under plausible adverse scenarios
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Changes to the Ed Note
Emphasis has been added on the key components of a
DCAT analysis
• Developing base scenario
• Developing and analyzing the impact of plausible
adverse scenarios
• Identifying and analyzing the effectiveness of risk
mitigation
• Reporting to the Board
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Changes to the Ed Note
Base scenario may still be consistent with business plan,
while recognizing
• Actual recent experience
– New OSFI requirements in E-15
• Assumptions different from those expected in the plan
• Recent management decisions which may not have been
anticipated in plan
• Impact on future experience of the above
• Differentiate between factual and subjective changes
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Changes to the Ed Note
Capital injections or changes to capital distributions
may be assumed in the base scenario, provided
• They are anticipated and agreed to by company
management
• They are feasible given company circumstances
• Clear reporting of assumptions made on capital
injections and capital distributions is essential
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Changes to the Ed Note
• Forecast period extended from 2 to 3 years for P&C
companies
• SoP 2530.07 changed accordingly
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Changes to the Ed Note
Development of plausible adverse scenarios
•
•
•
•
•
More emphasis on 95th to 99th percentile range
Draw on stochastic work where available
For others, variation in experience study results
Stress testing
P&C: less prescriptive than before
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Changes to the Ed Note
In analyzing impact of plausible adverse scenarios:
• Additional capital resources would generally not be
considered
– However, in limited instances where adverse factors are
more under management’s control (e.g. sales) it may be
appropriate to assume capital injections or change in
capital distributions
• Management actions should be considered
• Clear reporting of assumed management actions or
capital assumptions is essential
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Changes to the Ed Note
Ripple effects
• Include:
– Changes in base scenario assumptions that may no longer be
appropriate
– Insurer’s expected response
– Policyholder actions
– Regulatory actions
– Rating agency actions
– Changes in capital injections or distributions
• Specific ripple effects are outlined in each risk category
• Actuary should report on potential regulatory or rating agency actions
but does not need to their model financial impact.
• SoP 2530.18 to .20 changed accordingly
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Changes to the Ed Note
Modeling section
• More detail on level of accounting information the model
should produce
• Reasonableness of results under plausible adverse
scenarios, including ripple effects
• Use results of stochastic modeling in DCAT analysis
(i.e., not stochastic DCAT)
• Modeling of ripple effect automatic or manual
• Draw from economic capital work to build adverse
scenarios
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Changes to the Ed Note
Reporting section
• Emphasize the primary audience is Board or Chief
Agent
• Audience also includes management and regulator
• Increased guidance on key elements of a good DCAT
report
• Tailor to Board requirements and interests
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Changes to the Ed Note
Key elements in the report are:
• Executive Summary
• DCAT Opinion
• Introduction
• Capital Adequacy Measure
• Background Discussion
• Base Scenario
• Adverse Scenarios
• Conclusions and Recommendations
• Appendices
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
SoP Changes
Reporting on Risk Categories
2530.21
• CURRENT
– The report would contain the key assumptions of the base scenario and
the plausible adverse scenarios posing the greatest risk to the
satisfactory financial condition of the insurer. The report would also
include comments on each of the risk categories identified in this
standard. The meaning of satisfactory financial condition under this
standard would be disclosed in the report.
• PROPOSED
– The report would contain the key assumptions of the base scenario and
the plausible adverse scenarios posing the greatest risk to the
satisfactory financial condition of the insurer. The report would disclose
each of the risk categories considered in undertaking the DCAT
analysis, including those identified in this standard. The meaning of
satisfactory financial condition under this standard would be disclosed
in the report.
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
P&C Risk Categories – Grouping Changes
Original Risk Category
New Risk Category
Frequency and Severity
Loss Frequency and Severity Risk
Pricing
Misestimation of Policy Liabilities
Policy Liabilities Risk
Inflation
Inflation Risk
Interest Rate
Premium Volume
Premium Risk
Expense
Reinsurance Risks
Reinsurance Risk
Deterioration of Asset Values
Investment Risk
Government and Political Action
Government and Political Risk
Off-Balance-Sheet Risks
Off-Balance Sheet Risk
Related Company Risk NEW
SoP 2530.13 changed accordingly
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
P&C Risk Categories – General Change
General Structure – Each section lists examples of:

possible events or triggers

possible ripple effects

possible management actions
more examples
added for each
Removing all references to specific percentages
More guidance to determine the 95th to 99th
percentile range
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
P&C Risk Categories –
Loss Frequency & Severity Risk
• Added more sample events:
– single major loss
– social inflation (moved from old inflation risk
category)
• Changed Loss Ratio event to simple Frequency &
Severity
– wanted to keep premium effects as a separate risk
category
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
P&C Risk Categories – Policy Liabilities Risk
(Formerly Misestimation of Policy Liabilities)
Adjusted to reflect discounted reserves
• Removed set percentages for stress-testing
• Added suggestions on how to determine the 95th to
99th percentile range
– analyze history of actual to expected loss
development
– fitting a model to loss development factors
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
P&C Risk Categories – Inflation Risk
• Clarified that this category is for inflation in costs
extraneous to the insurance business (covered in risk
category 1)
• Social inflation moved to risk category 1
• Added a suggestion on how to determine the
95th to 99th percentile range
– review of variation in 3-year band of CPI over
time (3-year to match forecast period)
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
P&C Risk Categories – Premium Risk
(Formerly Pricing and Premium Volume)
Old Pricing
• Rate Freeze – moved to Government Action
• Parameter Risk eliminated (since it applies to all risk categories)
• Left with events related to competition and underpricing
– similar to premium volume risk category
– recommend combining the two risk categories
New Premium Risk
• Removed set percentages for stress testing
• Two situations may create an adverse scenario:
– Premium volume lower than base scenario
– Premium volume higher than base scenario
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
P&C Risk Categories – Expense Risk
• Eliminated
• Risk category had limited application
• Most events are really ripple effects
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
P&C Risk Categories – Reinsurance Risk
• Added more guidance about items to consider that
may impact company
• Removed set percentages for stress-testing
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
P&C Risk Categories – Investment Risk
(Formerly Interest Rate and Deterioration of Asset Values)
• Removed set percentages for adjustments to asset
values
• Added guidance on determining probability
– analyze CIA Canadian Economic Statistics for
1-year variation equities or 3-year variation in
interest rates (3-year to match forecast period)
– use stochastic modeling if available
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
P&C Risk Categories – Related Company Risk
New
A legal entity may run into difficulties due to difficulties
encountered by another entity to which it is related.
Simply put, the goal of this category is to evaluate the
impact on the valued company (insurer) of
circumstances happening in the related companies.
Why is it important?
•more globalization in the insurance industry
•more consolidation in the insurance industry
•more variety in corporate organizational structures
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
P&C Risk Categories – Related Company Risk
Possible events or triggers for the risk:
• The company cannot rely on financial support from its parent
company – when a group’s financial resources are needed to
support a financially-impaired parent or affiliate company
• The company must provide financial support to its parent
company. This is equivalent to the first situation except that
the funds the company expected to have for its own purposes
are now needed to support other entities in the group
• Disruptions in services provided by related companies or at a
group level may stress the company’s ability to achieve its
business plan
• Rating agency downgrade reflecting difficult financial
conditions at the group level.
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Life Risk Categories – Minor Changes
• Mortality
– Add death supported
– Separate ripple effects from management action
• Morbidity
– Add examples specific to critical illness insurance
– Separate ripple effects from management action
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Life Risk Categories – Minor Changes
• Persistency/lapse
– Cover both persistency and lapse
– Added more causes and ripple effects
• C1
– Suggestions on integrated scenarios
– Add disability as a ripple effect
– Add management actions
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Life Risk Categories – Minor Changes
• Expense
– Minor changes
• Reinsurance
– Added dispute over policy/treaty conditions
• Government and political
– Add cost shifting
– Add distribution channels
– Add ripple effects
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Life Risk Categories – Minor Changes
• Off-Balance-Sheet
– Add employee benefits and liabilities
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Life Risk Categories – Bigger Changes
• C3
– Relax stress testing
– Determining zero point may be impractical
– Additional deterministic testing an option
– Using higher percentile values from stochastic
models an option
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Life Risk Categories – Bigger Changes
• New business
– Increased importance of higher than expected new
business
– Equal importance to higher than expected and
lower than expected
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Life Risk Categories – New
• Related company
– Financial support from parent
– Impairment of parent or affiliate
– Group requirements may impact on insurer’s
strategy
– Possible downgrade
– SoP 2530.12 changed accordingly
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Other risks under consideration
• Liquidity
– Cashflow positions
– Policyholder withdrawals
– Asset sales and run-on-the-bank
• Operational risk
– Controls and procedures
– Business continuity
– Risk management
– Reputational risks
– Marketing and distribution risks
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Appendix A – Regulatory Capital Requirements
• Overview of minimum regulatory requirements
• Actuary must review appropriate guidelines for
company situation
• SoP 2530.06 changed to remove reference to specific
requirement
PROPOSED
– The minimum regulatory capital requirement is that imposed by
the regulator requiring the actuary’s report on the insurer’s
financial condition or, in the absence of such a requirement, that
selected by the insurer and approved by the regulator(s).
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Next Steps
• Revised Ed Note approved by RMCR and PCFRC in
May, 2006
• P&C Risk Categories are finalized and approved by
PCFRC
• Finalize Life Risk Categories as soon as possible
• Release complete Ed Note in 2006
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
In summary
Practice and approach to DCAT will change as a result
of:
• Modeling of ripple effects and reflection of regulator
and rating agency actions
• Risk categories are broader
• Reflection of capital enhancements/distributions
• Integration of economic capital and other stochastic
work
• Reporting is focused on Board and management
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Many thanks to
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Emile Elefteriadis
Jean-Guy Lapointe
Marie-Hélène Malenfant
Karim Nanji
Kamran Quavi
Linda Goss
Pierre Dionne
Denis Poulin
Xavier Bénarosch
Wally Bridel
Isabelle Périgny
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements
CIA Annual Meeting  Assemblée annuelle de l’ICA
Questions ?
VAL -6: Update from the CIA Committee on Risk Management and Capital Requirements