2016 Fall #28 b ii

DulcineaDelCADulcineaDelCA
in CIA.Subseq

When the action is do nothing, does it mean nothing nothing / nada / zilch, or nothing except disclose in the notes to financial statements?

In b ii we have a reinsurer insolvency that only accounts for 0.5% of the ceded business, so the event is immaterial. However your solution added that AA should disclose in the notes to the financial statements; examiner’s report (last three lines) also mentioned that candidate who indicated AA should do nothing lost points.

Is doing nothing (with no disclosure) ever a possible cause of action? What about the situation when there is a change in industry benchmark? Do we need to disclose?

On a separate note, does data defect/calculation error always needs to be reflected (even if it is immaterial)?

Comments

  • grahamgraham

    According to the source text, these are the possible actions depending on the which branch of the decision tree you are on:

    • left branch: reflect (that's the only option. since it's part of your data set, it will automatically be reflected even if it isn't material)
    • middle branch: reflect or inform
    • right branch: nothing, withdraw/amend

    So normally it is only the right branch where doing nothing is a valid option.

    But the industry benchmarks example is not clear. Regarding this example, the source text says only that the actuary is not required to incorporate the new industry data if it isn't material. It doesn't say specifically say that the change must be disclosed. But now that I've looked at this again, I think it's safer for you to say disclose or inform only if the change in benchmarks is not material. I have edited the wiki to reflect that.

  • chrisboersmachrisboersma

    The page before the flow-chart has a nice detailed explanation about materiality and disclosure.

    From an auditor’s perspective, an adjusting event that is not material does not have to be reflected and a non-adjusting event that is not material does not require disclosure. If the actuary determines that an event is not material to the actuarial valuation of insurance contract liabilities, the actuary may not need to use the event decision tree. Nevertheless, the actuary would communicate to the auditor the details of such events since the auditor maintains various materiality thresholds. While actuarial standards may not require the actuary to change his or her analysis, the auditor may nevertheless have to consider the effect of the event

    ...

    As noted previously, when working with the event decision tree, it is critical that the actuary keep in mind the concept of materiality.

    I'm not sure ignore/nada/zilch is the "best" term. I think you'll always need to note anomalous observations in your own log so that you can say later state: that you considered it and determined it was "not material". In general larger non-material issues should be escalated to auditor to ensure they are including it in their estimates.

    For example if you're missing one very small claims (< $200) in a very large portfolio ($10B) it probably isn't worth withdrawing/amending a report for (a report that might cost ~ $200k to create). On the other hand if you find you're off by $10m, they user might want to know (0.1%)

  • DulcineaDelCADulcineaDelCA

    Thank you both - from yet another fellow OCD-er. :)

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