Memorandum to the Appointed Actuary (2024)

Note

Previous versions of this memo are available for reporting on or before December 31, 2024:

• IFRS 17 Property and Casualty Memorandum to the Appointed Actuary - 2023
• IFRS 17 Life Memorandum to the Appointed Actuary - 2023

1. Overview

The Memorandum to the Appointed Actuary (Memorandum) describes our expectations regarding the appointed actuary's report (AAR) on the valuation of actuarial and other policy liabilities for life, property and casualty (P&C), and mortgage insurers. Insurers must submit a copy of the AAR in a form determined by the Superintendent as specified in subsection 667(2) of the Insurance Companies Act (ICA).

The AAR includes three major components:

• text that describes the valuation and the assumptions and considerations that were employed in that work,
• exhibits and appendices that present the quantitative analysis and supporting information, and
• regulatory schedules and supplementary tables that we require.

For P&C and mortgage insurers, we also require that the AAR includes text and calculations that support the regulatory capital tests.

The Memorandum provides guidance on the first component of the AAR, specifically the types and extent of information required to describe the valuation. The Memorandum also describes the detail necessary to support the regulatory capital test for P&C and mortgage insurers.

We do not provide guidance related to the exhibits and appendices that are part of AARs. Therefore, AAs may organize and present their analyses as they choose. The Memorandum does not address the required regulatory schedules; instructions for these schedules will be provided in the schedules themselves.

Filing instructions for the AAR (as well as the reports on financial condition testing, FCT, and peer review) are provided in Appendix I of the Memorandum.

We expect the text of the AAR, combined with the exhibits, appendices, regulatory schedules, and supplementary tables, to enable a knowledgeable reader to understand the valuation and key judgements and decisions that the AA made in conducting their work. 

The AA should be a Fellow of the Canadian Institute of Actuaries. The AAR should include the AA's signed expression of opinion concerning the appropriateness of the actuarial and other policy liabilities included in the insurer's financial statements.

Many insurers are required to file an AAR as part of the annual return forms with more than one Canadian regulator (for example, federal, provincial). The AAR produced in accordance with these requirements may or may not meet the requirements of other regulators.

2. Generally accepted actuarial practice

Both the ICA and Guideline E-15 – Appointed Actuary: Legal Requirements, Qualification and Peer Review require the work of the AA to be in accordance with accepted actuarial practice. We expect AAs to clearly identify and provide justification when they do not follow accepted actuarial practice or the requirements of the Memorandum.

For the purposes of the Memorandum, accepted actuarial practice is embodied by Standards of Practice promulgated by the Actuarial Standards Board supplemented by educational notes issued by the Canadian Institute of Actuaries (CIA). Educational notes are not exhaustive descriptions of accepted actuarial practice and, therefore, an AA's practice does not necessarily fall outside accepted actuarial practice solely because it is not described in an educational note.

The Memorandum does not contain any requirements that override or limit accepted actuarial practice in Canada.

3. Our review

The AAR is a critical input in our assessment of an insurer's financial resilience. We expect documentation that adequately supports the determination of the actuarial and other policy liabilities reported in the annual return.

Upon review of the filed annual return and AAR, we might decide to conduct further review and could request the AA to provide supplemental detail. We reserve the right to reject assumptions or methods and request the AA to re-calculate actuarial and other policy liabilities using alternative assumptions or methods. Depending on our findings, we could require the AA to amend and re-file the AAR and annual return or reflect required changes in subsequent filings. We also could require review from an independent actuary. We expect the AA to respond promptly to all our requests related to the AAR and annual return.

4. Required contents of the AAR

We require the AAR to contain the following major types of information:

• table of contents
• identification of the AA and peer review actuary
• materiality
• expression of opinion
• changes that influenced the valuation
• product descriptions
• reinsurance held
• data
• actual and expected experience
• methodology
• assumptions
• reliance on the work of others
• table of exhibits and appendices

A description of each of these types of information is provided in the sub-sections that follow. Description of the information required to support the regulatory capital tests for P&C and mortgage insurers is included in Section 5.

While we do not specify the order or organization of the text of the AAR, we expect AAs to develop the AAR in a manner that facilitates efficient and effective review by intended users and to consider the value of consistency when introducing year-over-year changes in structure and organization.

4.1 Table of contents

The table of contents of an AAR serves two purposes. First, it gives users an overview of the AAR's contents and organization. This is particularly valuable when the table of contents is extended to include major section headings within each of the types of information required. Second, the table of contents facilitates users' ability to locate desired information in the AAR.

4.2 Identification of the AA and peer review actuary

The AA should dislose whether they are an employee of the insurer or a consultant. The AA should also identify the duration for which they have served as AA of the insurer. The AA should confirm compliance with continuing education requirements.

The AAR should identify the peer reviewer, the peer reviewer's employer, and the tenure of the peer reviewer with the insurer.

4.3 Materiality

The AA should describe the materiality standard applied in their work and how they determined that amount. The AA should compare their materiality to the external audit materiality.

4.4 Expression of opinion

The AAR must include the AA's opinion on the valuation of the actuarial and other policy liabilities included in the insurer's financial statements as required by the ICA. The requirement applies regardless of the accounting standard under which the liabilities were measured. The actuarial and other policy liabilities arise from (re-)insurance contracts issued, reinsurance contracts held, and investment contracts with discretionary participation features (DPF), some or all of which may be accounted for under IFRS 17, IFRS 9, or IFRS 15.

The AA should use the format specified in the CIA Standards of Practice, practice-specific standards for insurers. We consider any opinion that varies from this wording to be a qualified opinion.

This section should contain the AA's signature (which can be electronic), the name of the AA (typed), and the date of signing.

We expect any actuarial opinion(s) presented to the shareholders and policyholders of the insurer to be essentially the same as the expression of opinion filed with us. Should this not be the case, the AA should disclose the rationale for the difference as well as the impact and implications of the difference. In addition, the AA should inform the lead supervisor in writing of such difference.

Any significant qualification or limitation concerning any aspect of the valuation should be noted in this section of the AAR. Qualifications or limitations should be similar to the ones included in the opinion for the annual return presented to the shareholders and policyholders. Caveats or any form of disclaimer should be excluded from the opinion but could be included in supplementary information supporting the opinion. 

The AA should issue a qualified opinion that is conditional upon receiving an unqualified opinion from the external auditor for branches where the external auditor report is not available at the time the AA renders their opinion. The AA should identify the expected completion date of the external auditor's work. When the external auditor's work is completed, the AA should either file an unqualified opinion or file a revised opinion with a supporting AAR issued if the external auditor is unable to give an unqualified opinion or modifies the financial statements.

4.5 Changes that influenced the valuation

The AA should identify and describe changes in the external or internal environment, changes in assumptions and methods, and other changes that affect the valuation. For the purposes of this disclosure, changes could involve policies, strategies, operations, business model, leadership, lines of business, underwriting, claims processes, or other similar issues that influence the AA's use of data, reliance on the work of others, or selection of methods, assumptions, or findings.

This discussion would include (where applicable) subjects such as:

• significant transactions or changes in reinsurance arrangements
• investment strategy (where discount rates use own assets as a reference portfolio or are based on actual underlying asset returns)
• changes in accounting policies used to account for some or all of the insurer's liabilities
• policies and methodologies relating to dividends and the management of par blocks for life insurers
• assumptions, methods, and models used to determine the liabilities
• model refinements and correction of errors
• exercise of insurer discretion

4.6 Product

The AA should identify the major product lines the insurer writes in the AAR. The AA should include a description of the significant characteristics of such products. The AA should consider homogeneity in product features across the industry and the associated knowledge and understanding of those characteristics that could be assumed on the part of users of the AAR. For example, an AA of a life insurer might discuss more details for the segregated fund or universal life products and less details for renewable term insurance. Similarly, the AA of a P&C insurer might discuss more details regarding emerging cyber coverages and less details for personal home and auto coverages.

4.7 Reinsurance held

4.7.1 Reinsurance arrangements

The AA should describe the insurer's reinsurance held, significant changes in its reinsurance arrangements, and the rationale for change, if any. The scope of the descriptions should include contracts accounted for under IFRS 17 as well as other international financial reporting standards. The description should include the following:

• types of reinsurance
• products and key risks covered
• amount of risk ceded and limits, if any, on coverage
• accounting standard applicable to the reinsurance
• back-to-back reinsurance contracts

The AA's description should include all significant reinsurance arrangements. A significant reinsurance arrangement is one in which either a significant amount of risk is transferred or a significant asset or liability is carried in relation to the arrangement.

The AA should also discuss and describe the following where they exist in significant reinsurance arrangements:

• arrangements that do not cede insurance risk or are accounted for under a financial standard other than IFRS 17
• unregistered reinsurance and the approach the insurer uses to mitigate its counterparty exposure
• arrangements in which the insurer and the reinsurer are related
• arrangements in which the insurer has ceded risk to a reinsurer on one set of terms where the reinsurer has accepted the same or similar risk from another insurer under materially different terms

The AA should describe and discuss significant internal reinsurance arrangements that are not otherwise identified where one entity within the corporate group cedes risk to another entity within the corporate group.

4.7.2 Accounting for reinsurance held assets and liabilities under IFRS 17

The AA should describe the valuation of reinsurance held assets and liabilities. Where components of the valuation are consistent with the valuation of direct contracts, the AA can reference the applicable sections of the AAR. Where applicable, descriptions should include at a minimum:

• provisions for non-performance risk
• embedded guarantees in funds withheld and modified coinsurance arrangements
• aggregate reinsurance treaties (for example, stop loss, catastrophe, aggregate excess of loss)

Where different from direct contracts, the AA should describe:

• discount rates
• risk adjustment
• assumptions and other valuation elements

4.7.3 Other IFRSs

The AA should identify reinsurance arrangements that are not accounted for under IFRS 17 and describe how associated assets and liabilities are determined. The description should identify the applicable standards used for accounting for the arrangements.

4.8 Data

The AAR should contain a description of the data used for the valuation and notable changes in data (if any) from the prior year and the reasons for such change. For example:

• for P&C insurers, the AAR should contain details about the treatment of salvage and subrogation, loss adjustment expense (allocated and unallocated), and reinsurance in the claims data.
• for life insurers, the AAR should describe the basis for reductions in disability payments for Canada Pension Plan, Quebec Pension Plan, and other income in disabled life reserves.
• for mortgage insurers, the AAR should contain details about the treatment of cure and recovery, loss adjustment expense (allocated and unallocated), and macroeconomic variables used in the data.

The AA should describe the controls used to provide assurance over the adequacy of the data used in the valuation.

The AAR should include a description of the extent to which the AA considers the work of the external auditor and if they do not use the work of the external auditor. Where the AA uses the work of the external auditor, details of the external auditor's work is not required in the AAR. If the external auditor's work is not complete when the AA provides their opinion, refer to Section 4.4 regarding the expression of opinion.

4.9 Actual and expected experience

The AAR should include comparisons of actual to expected experience for significant assumptions used in the measurement of actuarial and policy liabilities. The AA should discuss significant differences between actual and expected experience. While some categories of experience (for example, expenses) are similar for life, P&C, and mortgage insurers, there are categories of experience that are different (for example, selected ultimate claim values for P&C insurers).

We expect AAs to provide a comparison of actual experience with expected experience for a period sufficient to provide users of the AAR a credible basis for evaluating the key assumptions. Ideally, the AA would provide the comparison over the most recent ten years for P&C and mortgage insurers and five years for life insurers. If data for that period are not currently available, the AA should comment on this fact,  discuss the rationale for the shorter period, and move toward our expectation.

4.9.1 Life insurers

The AA should discuss actual experience in comparison to expected experience for significant assumptions (for example, mortality, policyholder behaviour).

4.9.2 P&C and mortgage insurers

Comparison of actual and expected experience consists of comparing ultimate undiscounted estimates of losses at the end of the current fiscal year with similar estimates made at the end of prior fiscal year-ends. The AA should conduct their analysis by accident year and line of business for either net business or gross and ceded business.

Discussion of actual and expected experience should include the following, where applicable:

• description of the reasons for significant differences between current and prior estimates of losses by line of business (including years that were considered closed)
• description of changes in methods or assumptions that were implemented to minimize future material development
• disclosure of the comparison using old lines of business where the AA changed the lines of business during the year
• estimation of the dollar effect of development where the AA uses underwriting year rather than accident year and comparison of projected loss ratios
• discussion of material differences between the loss development on page 60.45 of the annual return and that shown in the comparison of actual experience (or confirmation that there are none)
• quantification and explanation of differences between the ultimate loss development presented in the Unpaid Claims and Loss Ratio Analysis Exhibit (UCLRE) and that shown in the comparison of actual experience

4.10 Methodology

With respect to methodology, the AAR should contain:

• identification of major accounting choices that deviate from industry norms where known (for example, use of general measurement model for lines of business that qualify for premium allocation approach or variable fee approach)
• identification of major estimation methods (for example, development, expected, and Bornhuetter-Ferguson method for P&C insurers; seriatim projection of expected cash flows for life insurers)
• discussion of methodologies used to determine probability-weighted cash flows where there are embedded guarantees, including identification and calibration of economic scenario generators
• identification of product lines where probability-weighted cash flows cannot be estimated using deterministic best estimate projections and discussion of how probability-weighted cash flows are determined for those product lines
• description of the construction of discount rates for cash flows that do not vary with an underlying item
• description of the projection of cash flows that vary with an underlying and the determination of the discount rate applied to those cash flows
• description of the determination of risk adjustment and the corresponding confidence level
• identification of products where cash flows are subject to the insurer's discretion (for example, participating products) and how that discretion is reflected in the valuation
• description of valuation fund mapping process for segregated fund products
• description of dividend determination, smooth mechanism, and the method used to allocate investment income, expenses, and taxes for participating policies
• description of bulk reserves and how they are determined

4.11 Assumptions

The AAR should contain a description of key assumptions and how they are derived. In particular, the AA should discuss the use of the insurer's data, industry data, and the review cycle for assumptions. There should also be a description of significant change(s) in key assumptions year-over-year and the rationale for such change(s).

4.12 Reliance on the work of others

There are several areas where AAs rely on the work of others in conducting the valuation of actuarial and other policy liabilities, including but not limited to:

• the external auditor for data
• another AA for the valuation of a pool (for example, Facility Association for P&C insurers)
• the external auditor for IFRS 17 choices
• other employees of the company for assumptions that are not uniquely within the purview of actuaries (for example, discount rates)

In the AAR, the AA should identify and describe their reliance on the work of others when significant to the valuation of actuarial and other policy liabilities. The AA should expressly indicate their acceptance of work performed by others and any reservations that might be associated with that reliance.

4.13 Table of exhibits and appendices

Similar to the table of contents discussed previously, a table that presents the organization and location of the exhibits and appendices that contain the quantitative analyses that comprise the valuation is of great value to users of the AAR.

5. Actuarial calculations supporting regulatory capital tests

The AA of a P&C or mortgage insurer should provide information used to calculate and complete the company's return for the minimum capital test (MCT), or branch adequacy of assets test (BAAT), or mortgage insurer capital adequacy test (MICAT). The AA should describe the information provided and details on how those amounts were determined. Appendix II and Appendix III lists the data elements we expect to be included in this disclosure.

Appendix I – Filing directions

Actuarial reports should be filed as follows:

• The AAR and the associated supplementary tables must be filed within sixty days of the end of the fiscal year.
• The FCT report and the accompanying template must be filed on or before the earlier of 30 days after the presentation to the board of directors, audit committee, or chief agent and one year after the fiscal year end.
• Pre-release peer review reports should be filed following the same timelines as the material reviewed as described in the preceding bullets.
• Post-release peer review reports relating to the AAR and associated work should be filed no later than thirty days after release of the AAR.
• Post-release FCT peer review reports should be filed no later than December 31.

Failure to meet the deadlines of the filings could result in a penalty fee under our Late and Erroneous Filing Penalty Framework. Guideline E-15 Appointed Actuary: Legal Requirements, Qualifications and Peer Review provides more details on filing deadlines.

The insurer should file one electronic copy of each report via the Regulatory Reporting System (RRS). A copy of the signed expression of opinion should be included in the electronic submission.

For security reasons, companies should not file reports or other documents through e-mail.

Reports should be converted to and submitted in PDF format. Scanned copies are not acceptable. The reports should not be security protected, and exhibits should be in a format that can easily be transferred to a spreadsheet. If the insurer does not follow these instructions, it should be prepared to promptly provide information in alternative formats upon request.

Supplementary tables and other documents should be submitted in the formats specified in the instructions for those files.

Insurers should follow the file naming conventions outlined in the instructions for unstructured financial returns.

Instructions on the use of the web portal can be found on our website under Regulatory Data and Returns / Filing Financial Returns / Canadian & Foreign Property and Casualty Insurance Companies.

Insurers should send an email to ReturnsAdmin@osfi-bsif.gc.ca or call 613-991-0609 prior to filing a peer review report within RRS.

The ICA requires insurers to file their AAR as well as their Annual Return. We will not accept a certificate containing only the opinion of the AA in lieu of a full AAR.

Insurers should complete and submit the corresponding supplementary tables via RRS at the same time as the AAR and FCT reports. Excel-based templates are provided for the submission of the supplementary tables. Instructions for completing the supplementary tables are embedded in the templates.

P&C and mortgage insurers should submit a completed copy of the UCLRE via RRS at the same time as the AAR. Instructions and other guidance for filing the UCLRE can be found on OSFI's website: Unpaid Claims and Loss Ratio Analysis Exhibit (UCLRE).

Appendix II – Actuarial items used for MCT/BAAT calculation

Appendix III - Actuarial items used for MICAT calculation