CIA.CSOP

Reading: Canadian Institute of Actuaries, Consolidated Standards of Practice, 1240, 1400, 1510, 1520, 1600, 1700, 2100, 2200, 2400, 2500, and 2600, January 1, 2020.

Synopsis: This reading is foundational and covers standards of practice that all actuaries are expected to follow. We will refer to these as CSOPs. Note however, that this material is already largely covered in other syllabus readings.   Forum

Study Tips

The 2019.Fall syllabus lists this reading as new, but it is really just a modification. The following sections were added: 1240, 1400, 1510, 1600, 1700, 2100. The CAS link to the source text is confusing because half the table of contents (CSOP 1240-1700) is listed on the first page of the reading but the rest of the table of contents (CSOP 2100-2600) is in the middle of the document.

Changes for 2020.Spring:

• New: Section 1460 - Quality Assurance. (It's short, only about 2 pages.)
• Substantially Modified: Section 2500 - DCAT

Normally you don't need to spend much time here because most of the important information has already been covered in other readings. But there's a huge problem related to the new DCAT material.

Please see IMPORTANT NOTE for clarification of an issue related to the removal of CIA.DCAT from the Fall 2020 syllabus.

Estimated study time: 1 day (not including subsequent review time)

Pop Quiz!    :-o

What are the acceptable ranges for each of the 3 MfAD categories: claims development, investment rate of return, and reinsurance recoveries? Click for answer.

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• reasons for MfAD(claims) to be higher than the high end (20%) of its range
• reasons for MfAD(inv) to be lower than the low end (2.5%) of its range
• enquiring and responding professional: definitions & communications
• definitions of claims & premium liabilities
• general considerations in estimating liabilites

Top Questions ← Questions you absolutely need to know!

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #20)	SCENARIO: - identify/correct AA errors
E (2017.Spring #25)	MfAD(claims): - reasons to be > 20%	see CIA.MfAD	see CIA.MfAD
E (2016.Fall #26)	definitions: - claims & premium liability	estimating liabilities: - considerations	see CIA.Discnt	see CIA.Disclosure
E (2015.Fall #25)	see CIA.MfAD	MfAD(claims): - reasons to be > 20%	MfAD(inv): - reasons to be < 2.5%
E (2014.Fall #31)	definitions: - enquiring/responding prof.	communications: - enquiring professional	communications: - responding professional

In Plain English!

CSOP 1240: Materiality

Recall that CSOP is an abbreviation for Consolidated Standards of Practice. Everything you need to know about CSOP 1240 is in CIA.Mat.

CSOP 1400: The Work

CSOP 1400 covers, among other topics, subsequent events and modeling. These are already covered in depth in CIA.Subseq and CIA.Models. The rest of this CSOP covers topics that are obvious and/or familiar. There was 1 item, however, right at the beginning that struck me as interesting.

Question: briefly describe when an actuarial approximation is appropriate

- an approximation is appropriate if it does any of the following without affecting the result

• reduces cost
• reduces time
• improves control

But what exactly does this mean? A different way of explaining it is to say:

• approximation permits the actuary to strike a balance between the benefit of precision and the effort of arriving at it

→ An example of an appropriate approximation is if you spend 5 seconds to reduce the expected error of your reserve estimate from 20% to 1%.

→ An example of an approximation that isn't appropriate is if you spend 10 years and a billion dollars to get an extra 0.0001% of accuracy. Duh.

True Story: Several years ago I was in a meeting where we were discussing Ben Zehnwirth's reserving software. The annual license was exceedingly expensive, and I said out loud, "Why do we care about a more accurate reserve estimate?". Everyone gave me strange looks so I dropped it, but what I had in mind was this idea of appropriate approximation. Zehnwirth had not provided us with what I thought was convincing evidence that his software would indeed work better (that's a whole other story) and the annual licence was something like $200,000 a year, plus all the time it takes to learn and customize the software. There was clearly a huge cost. There should be a correspondingly huge benefit. Otherwise the resulting reserve approximations are not appropriate.

Subsection 1460: Quality Assurance (New for 2020.Spring)

I'm not sure if this new subsection is a big deal or whether the examiners themselves have even read it. It's only 2 pages and when I scanned it for potential exam questions, here's what I found:

Question: identify examples of quality assurance processes

• check calculations
• validate models (this is discussed in great detail in CIA.Models)
• redo the work (gosh, that seems like a lot of trouble!)
• peer review (see OSFI.AA - peer review)

Question: identify considerations in determining what quality assurance processes to perform

• purpose of work
• complexity of work
• significance of work

and also...

• vulnerability to error
• expectations of user
• legislative requirements (for peer review)

The answers to the questions above are things you could probably come up with even if you hadn't memorized them. They are pretty much common sense. I wouldn't stress too much over this section, but I wanted to include it since it's new and could be easy points on the exam.

Oh, and Alice just reminded me of an extremely obvious addition to Section 1490 - Documentation that's related to this new section on Quality Assurance. The documentation CSOP now states that the quality assurance process should be documented. Duh.

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CSOP 1510: Actuary's Use of Another Person's Work

This CSOP has an "exam-ready" bullet point list. If I were studying, that's all I would learn from this section.

Question: identify items an actuary should consider before using using another person's work

• qualifications of the other person
• regular communication & info-sharing with the other person
• awareness by the other person of how the work is being used

I don't think this list is too hard to remember. The 3 items are common sense. (The source text listed 5 items, but these 3 seem to capture the intent well enough.) Anyway, I always like to spend extra minute or two thinking of examples. That always helps my memory. Bonus points for humour.

Examples:

• qualifications:

   - the other person is an ACAS or FCAS → good! :-)

   - the other person is a lazy summer intern named 'Luke' who is the boss's nephew → not so good :-(

• communication & info-sharing:

   - the other person has a 10-15 chat minute with you every morning → great! :-)

   - the other person blocked your cell → uh-oh :-(

• awareness:

   - the other person asked you details about how you're using their work → awesome! :-D

   - the other person's favourite T-shirt says: I don't give a fuck. :-o

CSOP 1520: Auditor's Use of an Actuary's Work

This section discusses the relationship between auditors and actuaries. Here are a few important acronyms:

CIA: Canadian Institute of Actuaries

CICA: Canadian Institute of Chartered Accountants

JPS: Joint Policy Statement

The collection of facts you need to know is in the quiz. (I didn't feel there was a good reason to duplicate all that information in the wiki.)

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CSOP 1600: Assumptions & Methods

This CSOP is stupid. I'm sorry but that's the truth and Alice agrees. The first bullet point says:

1610.01: The actuary should select a method that takes account of the circumstances affecting the work.

Um, really? I would never have thought of that, said I, dripping with sarcasm.

They go on to say:

1620.01: The actuary should identify and select each assumption that is needed for the work.

Duh. Actually there's a small exception to these that might be worth mentioning:

• sometimes methods or assumptions are mandated by law or stipulated by the terms of the engagement

The section on CSOP is about 8 pages long and nothing really jumped out as a likely exam question. Some of the topics addressed are:

• ranges for assumptions
• historical experience versus future predictions
• assumptions that are independently reasonable and/or reasonable in the aggregate
• anti-selection (which seems to be the life insurance term for adverse selection)

Note also that many of the examples provided in the text are from life insurance. All in all, I don't think CSOP 1600 is worth spending much time on. If there's a question on the exam, chances are you can answer it with common sense and general knowledge.

CSOP 1700: Reporting

CSOP 1700 is mainly common sense information. The most important concept in reporting is the intended use & user. This same concept came up in Odo.FinReg in the subsection SAP vs GAAP. For BattleQuiz #1 in that wiki article, you were asked to identify the objective and users for financial statements prepared under SAP versus those under GAAP. The same idea applies to reporting in general, and there are different categories of reports (see below) for different uses & users.

Another reading where reporting considerations are discussed is CIA.Mat in the subsection disclosure and reporting for materiality. Take 2 minutes to review it. It's always good to relate new information to things you already know.

So getting back to CSOP 1700, I found a few good exam-style questions.

Question: identify & briefly describe 4 types of actuarial reports according to CSOP 1700

• external report

   - formal & detailed

   - range of appropriate reports is narrow (narrower than for internal reports)

• internal report

   - may be formal & detailed OR informal & abbreviated depending on use & user

   - range of appropriate reports is wide (wider than for external reports)

• oral report

   - useful to an internal user

   - disadvantage (versus internal report) is no written record

• summary report

   - a simplified way to communicate actuary's analysis

   - may be part of an external or internal report

Question: identify items included in an external report according to CSOP 1700

• name of client
• description of work, use, user
• state that it may not be appropriate for other uses
• state whether accepted actuarial practice was used (I hope so!)
• assumptions (and justification)
• methods (descriptions of)
• reservations (if any)

(and many others, most of which are common sense)

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CSOP 2100: Insurance Contract Valuation - All Insurance

CSOP 2100 is a more general version of CSOP 2200. It's roughly 20 pages of bullet point lists, some of which is common sense while some is very obscure. I pulled out 2 paragraphs that are worth reading, but I couldn't find anything that would make a good exam question.

Question: briefly describe the actuary's responsibility regarding valuation according the CSOP 2100

2120.01: The actuary should value the insurance contract liabilities and the reinsurance recoverables for the statement of financial position and the changes in them for the statement of income. [Effective April 15, 2017]

A key point is that you have to explicitly mention reinsurance recoverables as well as changes in liabilities because that affects income. I think this is a low-probability question.

The next item often appears in some form on the U.S. version of Exam 6, but the appointed actuary's report is given much more weight in general. The 6C exam committee emphasizes different topics so I think this is a low-probability question as well.

Question: what is the standard reporting language for the AA's report according to CSOP 2100

2130.16:

To the policyholders [and shareholders] of [the ABC Insurance Company]

I have valued the policy liabilities [and reinsurance recoverables] of [the Company] for its [consolidated] [statement of financial position] at [31 December XXXX] and their changes in the [consolidated] [statement of income] for the year then ended in accordance with accepted actuarial practice in Canada including selection of appropriate assumptions and methods.

In my opinion, the amount of policy liabilities [net of reinsurance recoverables], makes appropriate provision for all policy obligations and the [consolidated] financial statements fairly present the results of the valuation.

[Montréal, Québec] [Mary F. Roe]

[Report date] Fellow, Canadian Institute of Actuaries

The language in square brackets is variable.

Actually, what they sometimes do on the U.S. exam is provide a version of that statement but with errors inserted. They then ask you to identify and correct the errors. Unfortunately, to do that means essentially memorizing the statement verbatim. One easy thing to note is that the FCIA designation is not optional, in Quebec, so if that's missing, that would be an error.

Pop Quiz!    :-o

• Which 2 provinces allow an exception to the rule that an 'actuary' must be a FCIA?

(The answer is in KPMG.PACICC in the subsection definition of an actuary.)

CSOP 2200, 2400, 2500, 2600

Virtually all of this is covered in other readings.

• 2200: Insurance Contract Valuation - P&C Insurance
• 2400: Appointed Actuary (see OSFI.AA)
• 2500: DCAT (see CIA.DCAT)
• 2600: Ratemaking (covered in detail in Exam 5)

I don't think you need to spend much time here, but here are a few technical definitions that were worth a full point on part (a) of this exam question:

E (2016.Fall #26)

defn of claim liability:	PV (claims, related expenses, future taxes) @ calculation date that were incurred before that date
defn of premium liability:	[ PV(claims, related expenses, future taxes, premium development) – DPAE ] @ calculation date incurred after that date on policies in-force on/earlier than that date

Those definitions are a mouthful, but Alice highly recommends you memorize them well.

Note that part (b) of that same question also comes out of this section. It asks for considerations when estimating liabilities, but that's something you could answer from general knowledge. Just blather something about U/W & claims practices, reinsurance, data credibility, etc...

More on CSOP 2500: DCAT

Recall from the study tip section at the top of this wiki article that the new DCAT material from the CSOP reading is inconsistent with the current version of the DCAT reading. The main differences are described below:

difference #1: satisfactory financial condition

• from CIA Educational Note (CIA.DCAT), these 2 conditions must be satisfied throughout the forecast period

1. for the base scenario → must have MCT ratio > 150%
2. for the base scenario and all plausible adverse scenarios → must have assets > liabilities

• from the current CSOP, these 3 conditions must be satisfied for all years in the forecast period

1. under the solvency scenarios → must have assets > liabilities
2. under going-concern scenarios → MCT ratio > 150% 100% (see related forum discussion) (span style="color: green;">(shout-out to xcf!)
3. under base scenario → MCT ratio > (internal target as determined by ORSA)

difference #2: classification of "scenarios"

• from CIA Educational Note (CIA.DCAT):

base scenario: a set of assumptions on risk factors that are consistent with business plan over the forecast period (if plan is realistic & consistent)

plausible adverse scenario: an adverse scenario that is credible and has a non-trivial probability of occurring (explained in detail in CIA.DCAT

• from the current CSOP:

base scenario: same as above

adverse scenario: An adverse scenario is developed by stress testing the assumptions used in forecasting the business plan, including the determination of insurance contract liabilities, with regard to risk factors that may trigger potential threats to the insurer’s financial condition.

solvency scenario: This term is not actually defined. It looks like it is being defined in section 2520.18.1 but all that section does is state when a solvency scenario is a plausible adverse scenario. In other words, it's telling us that the set of plausible adverse scenarios is a subset of the the set of solvency scenarios. But it never actually defines the term "solvency scenario".

going-concern scenario: A going concern scenario is an adverse scenario that is more likely to occur and/or less severe than a solvency scenario, and could include risks not considered in solvency scenarios.

Alice-the-Actuary isn't sure what advice to give here. See IMPORTANT NOTE for clarification.

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  Forum

POP QUIZ ANSWERS

Acceptable ranges for MfAD categories:

MfAD(clms): 2.5% --> 20%

MfAD(inv): 25 --> 200 bps

MfAD(re): 0% --> 15%