Odo.FinReg

Don't panic! This reference is 475pgs, but the syllabus only covers about 50pgs. It's basic accounting stuff, with some Canadian content and Solvency 2 thrown in.   Forum

BattlePlan

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

• how to calculate the value of the commuted claims in a commutation (hard!!)
• definitions of basic accounting terms
• basic facts about the 2 main types of accounting principles SAP (Statutory Accounting Principles) and GAAP (Generally Accepted Accounting Principles)

Top Questions ← Questions you absolutely need to know!

reference	part (a)	part (b)	part (c)	part (d)
E (2018.Spring #23)	basic accounting terms - liquidation & going-concern	basic accounting terms - accounting principles & accounting rules
E (2017.Fall #14)	see CIA.MfAD, CCIR.ARinstr	basic accounting terms - fair value & historical cost
E (2017.Fall #19)	commutation: - compute value
E (2015.Fall #11)	commutation: - compute value
E (2015.Spring #31)	basic accounting terms - liquidation & going-concern	basic accounting terms - fair value & historical cost	basic accounting terms - accounting principles & accounting rules
E (2014.Spring #23)	SAP v GAAP: - objective	SAP v GAAP: - intended user	SAP v GAAP: - asset recognition	SAP v GAAP: - deferred taxes
E (2013.Fall #18)	commutation: - compute value

In Plain English!

SAP, GAAP, CGAAP

The introductory chapters of this reading cover SAP (Statutory Accounting Principles), GAAP (Generally Accepted Accounting Principles), CGAAP (Canadian Generally Accepted Accounting Principles). These straightforward concepts are covered in the BattleQuiz.

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Basic Accounting Principles/Terms

This reading covers extremely basic accounting concepts. If you've had a university course in accounting, you already know much of the material. Let's get Canadian for a moment! The MaRS website lists the 4 main elements of a financial statement as:

• B/S or Balance Sheet
• I/S or Income Statement
• Statement of Retained Earnings
• CF Statement (CF = Cash Flow)

If you want to know more, check out that page of their website at: MaRS Financial Statements. (Don't know what MaRS is? It's an entrepreneurial incubator located near Queen's Park in downtown Toronto!)

Check the BattleQuiz for terms that have been asked on a prior exam.

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Solvency 2

This chapter (Ch. 25) of the Odomirok textbook is new to the Exam 6-Canada syllabus as of Fall 2017. But Solvency 2 itself is not new to the syllabus. There had been a whole reading devoted to Solvency 2, so it feels like this topic has been downgraded. For this new version of the Solvency 2 reading, there are 2 items you must know:

item 1: what is Solvency 2

Solvency 2 is a principles-based insurance regulatory system TO DETERMINE the required capital levels of insurance companies IN the European Union.

item 2: what are the 3 pillars of Solvency 2 [Hint: QGT]

1. Quantitative: sets SCR & MCR (Solvency Capital Requirement & Minimum Capital Requirement)

   - uses a total balance sheet approach

   - SCR corresponds to 99.5% VaR (Value at Risk) meaning that the probability of ruin is < 0.5%

2. Governance: supervisory activities (internal control & risk management, supervisory review process)

   - requires adequate governance for: ♦ internal audit ♦ actuarial ♦ risk management ♦ compliance

   - supervisor identifies high-risk companies and may intervene

   - note that companies are required to perform ORSA (Own Risk & Solvency Assessment) under pillar #2 (see OSFI.ORSA)

3. Transparency: supervisory reporting & public disclosure

   - information from pillars 1 & 2 are given to the supervisor & financial markets

   - purpose is to increase market discipline because companies know their decisions are public

Alice the Actuary told me that the 3 pillars was asked multiple times on past versions of the exam. (You should believe her - she's pretty smart!)

Context for Solvency 2

Note the connection between Solvency 2 and OSFI.MCT. Both are implementations of a capital adequacy framework:

• OSFI.MCT is for Canada.
• Solvency 2 is for the European Union.

One interesting difference between MCT and Solvency 2 is that MCT applies static risk factors whereas Solvency 2 is principles-based. That means that Solvency 2 may be more adaptable to circumstances, but also harder to apply.

ENID

ENID stands for Events not in Data. It is discussed in IFA.Solvency2. The idea is that when setting reserves, it might be prudent to take into account possible events that have not appeared in your historical data. An example might be a pending change in legislation that would retroactively impact claim costs. Anyway, I just wanted to highlight the connection to Odo.FinReg. A good exam question would be to combine concepts from both papers. This will be discussed more fully when you get to IFA.Solvency2.

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Chapters 27 & 28

• Chapter 27 covers Financial Reporting in Canada
• Chapter 28 covers the Canadian Annual Statement
• These chapters cover roughly 20 pages. Much of it is either very general or covered in other syllabus readings. One big exception is in chapter 28 in the section Commutation of Claims (p349-351.)

Commutation

There are three old exam problems, (2017.Fall #19), (2015.Fall #11), (2013.Fall #18a), that were quite difficult, where you had to calculate the value of commuted claims. (Based on the pattern, will this question appear again on (2019.Fall)??)

Solution to 2017.Fall #19

Solution to 2015.Fall #11

Solution to 2013.Fall #18a

4 Commutation Practice Problems

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BattleCodes

Memorize:

• purpose and main concept for the 3 accounting systems: SAP, GAAP, CGAAP
• side by side comparison of SAP & GAAP (see BattleCards)
• basic terms: (liquidation versus going-concern), (fair value versus historical cost), (principle-based versus rule-based accounting systems)
• Solvency 2: defn, 3 pillars, 3 conditions, 4 functions
• definition of commutation

Conceptual:

• Note how both OSFI.MCT and Solvency 2 are specific implementations of the general framework discussed in ICP17.CapAdeq

Calculational:

• value of commuted claims

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