2006 Seminar for the Appointed Actuary

1
Canadian Institute of Actuaries
LInstitut canadien des actuaires

• 2006 Seminar for the Appointed Actuary
• Colloque pour lactuaire désigné 2006

2
PD-7 Report of the Task Force on
MaterialityReview of Current Practices

• Patricia Hladun
• Office of the Superintendent of Financial
  Institutions

3
Overview

• 150 AARs and 52 DCAT reports as at year-end 2004
  were reviewed
• AARs and DCATs were reviewed separately due to
  significant differences in the standard
  magnitudes and bases
• methods or measures considered were those present
  in at least 5 of the reports

4
AAR - use of materiality

• used as a guideline to determine the significance
  of an omission, understatement or overstatement
  in the data used to form the opinion
• a decision, assumption, selection, or inference
  the actuary made would be changed or influenced
  or a decision of a user of the valuation who has
  a reasonable knowledge of business or economic
  activity would be changed or influenced
• a subsequent event (such as an error in the data
  discovered after issuing the report) having an
  impact in results of less than x may not require
  a revision to the valuation

5
AAR - use of materiality

• reasonable range was occasionally calculated in
  addition to materiality
• data reconciliation was often held at a tighter
  tolerance than the stated materiality standard

6
AAR - summary of methods

• We categorized the approaches into the following
  methods
• 61 rule of thumb
• 24 judgment with validation
• 8 judgment
• 6 external auditors standard
• 1 no standard

7
AAR rule of thumb

• Also considered were
• the MCT/BAAT ratio and
• the auditors materiality standard

8
AAR rule of thumb
9
AAR judgment with validation
10
AAR pure judgment

• Some or all of the following were considered
• value of the unpaid liabilities
• surplus position of the company and the margins
  on solvency tests
• external auditors materiality level
• position of Head Office Account
• potential users of the financial statements
• net written premium and growth in written
  business
• potential impact of errors on future premium
  levels and retro-assessments
• net income after tax

11
AAR auditors standard

• 9 reports indicated that the materiality standard
  was equivalent to the auditors standard and did
  not provide any additional validation
• many actuaries indicated that the materiality
  standard had been discussed with the external
  auditor
• in some cases the actuary decreased the standard
  from that indicated by the rule of thumb to the
  auditors standard

12
AAR external review comments

• Comments focused on the following issues
• the standard is larger than typically seen
• the standard is more narrow than typically seen
• the standard is only justified by the current
  large asset base
• the actuarys standard is larger than the
  auditors standard
• no explanation of the derivation of the standard
  is included in the AAR
• no statement of discussion of the standard with
  the auditor is included
• carried liabilities are materially greater than
  the AAs estimate but there is no disclosure in
  the notes to financial statements

13
DCAT - use of materiality

• used as a guideline to determine the significance
  of an omission, understatement or overstatement
  in the data used to form the opinion
• should become more rigorous in examining a
  scenario where the solvency margin is closer to
  the minimum threshold
• used to determine the level of rigor required in
  the analysis

14
DCAT - summary of methods

• We categorized the approaches into the following
  methods
• 42 standard based on a measure or verified
  against a measure
• 33 judgment
• 25 no standard

15
DCAT notable measures
16
DCAT external review comments

• all comments on the materiality standard, except
  one, stated that the AA did not refer to a
  standard in the report
• the lone other comment stated that the selected
  materiality standard in the pre-release report
  was too low but that it was increased in the
  final version of the report.