OSFI.MemoAA

OSFI.MemoAA is an insurer-specific paper that communicates OSFI's DETAILED expectations regarding the AAR (Appointed Actuary's Report). It's an indispensable reference if you're assisting with the AAR.   Forum

Pop Quiz

What is the difference between an Annual Return and Financial Statements?

BattlePlan

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

• required disclosures when a has been appointed new AA:
• is it ok for the AA's reserve estimate to be different from the booked amount

Top Questions ← Questions you absolutely need to know!

reference	part (a)	part (b)	part (c)	part (d)
E (2016.Fall #27)	see OSFI.AA	new AA: - required disclosures	(c) see OSFI.AA (d) AA estimate v booked	(e) see CIA.PrLiabs (f) see OSFI.AA
E (2015.Spring #32)	see ICA.Ch47	see OSFI.AA	new AA: - required disclosures	see ICA.Ch47
E (2013.Fall #34)	see OSFI.AA	new AA: - required disclosures	see ICA.Ch47

In Plain English!

Intro

This paper describes OSFI's requirements surrounding the AAR (Appointed Actuary's Report.) In particular:

• manner of presentation (sections headings that should be included)
• level of detail (data and calculations)
• discussion items that should be included (differences between actual and expected values)

I don't think you have to memorize this. It's just to give you a general idea of what OSFI wants.

AAR Contents

The AAR is part of an insurer's Annual Return. The AAR must contain:

OPINION: on whether policy liabilities as determined by AA are fairly represented in insurer's Financial Statements

ALSO: detailed commentary, data, calculations

The filing deadline for the AAR is within 60 days of fiscal year-end.

AA Opinion

The appointed actuary's opinion is the overall summary of the AAR.

Goal: A company's goal is to receive an unqualified opinion from the AA. An unqualified opinion means the AA believes the actuarial estimates of liabilities are reasonable, and that those estimates are reflected fairly in the Annual Return. (OSFI states this in a more technical way, but that's the basic idea.)

If the AA gives a qualified opinion, that's a bad thing. This might happen if the AA thinks the company's actuary under-estimated the policy liabilities.

True Story: Alice the Actuary worked at a company where the AA provided an unqualified opinion, but 3 months later it was discovered that the reserves were too low by tens of millions of dollars, or about 20% of the total reserves. The chief actuary was summarily fired, and the AA was s**tting bricks. He knew that company's estimates were way too low, but fudged the numbers because he didn't want to lose the contract. The company was pursuing an extremely aggressive growth strategy and the premium was pouring in. Things looked great until the claims started pouring in! The chief actuary was a smart guy, but product managers had pressured him into low-balling the reserves to make their business look more profitable. (This was done through picking artificially low LDFs and trends.) Alice often had to put on her headphones to drown out the yelling and swearing coming from the chief actuary's office.

Moral of the Story: This was a great example of how all the checks and balances failed. Nobody wanted to be they bad guy. Senior executives pressured product managers to grow the business and generate profits. The product managers pressured the chief actuary to low-ball the reserves. The chief actuary pressured the AA into signing an unqualified opinion. The problem was finally discovered by a newly hired FCAS. He saw the problem during the first quarter valuation, and spoke up. It was a risk on his part, but he knew the problem couldn't be hidden forever, and if he didn't speak up right away, he would be complicit.

Alice likes to use the abbreviation RelSuff to mean reliable and sufficient:

• The AA's main responsibility regarding data in the AAR is to ensure that it is RelSuff for valuation purposes.

Disclosures

Below is a questions that's been asked 3 times: (2016.Fall #27b), (2015.Spring #32c), (2013.Fall #34b)

Question: If a new AA has been appointed, what disclosures must this new AA provide in the next AAR?

Answer: See Full BattleQuiz below. (Hint: dates, communications, qualifications)

If you only have time to memorize one thing from this paper, this is the thing!

mini BattleQuiz 1 You must be logged in or this will not work.

Discounted and Undiscounted Loss Ratios

There is an appendix covering something called the Unpaid Claims and Loss Ratio Exhibit. The main topic is the calculation of the discounted and undiscounted loss ratios but those calculations are more related the the APV calculations in the CIA.MfAD - Loss Ratio Exhibit.

Syllabus Change 2020.Spring: The calculation of the discounted loss ratio has been removed from the OSFI.MemoAA source text. It is provided here for informational purposes only. This calculation has appeared on prior exams but should not appear on any exams starting with 2020.Spring.

BattleCodes

• Memorize:
  • contents of AA report
  • contents of an unqualified opinion
  • actuary's responsibility regarding data in the AAR (Hint: RelSuff)
  • disclosures required by a new AA in AAR

• Conceptual:
  • There is a reason for having an AA review the company's valuation. It provides an independent check on the company's actuaries. Or it's supposed to. But all the advice in the world from OSFI and CIA can't "cure" human nature. On a much larger scale, you can argue that this was the cause of the 2007-2008 financial crisis. Plenty of people saw the signs, but they were either ignored, or simply bullied into shutting the f**k up!

• Calculational:
  • none

The Full BattleQuiz only has 6 items.

Full BattleQuiz You must be logged in or this will not work.

  Forum

POP QUIZ ANSWERS

Financial Statements: numerical record of financial performance (balance sheet, income statement, cash flows, supporting exhibits)

Annual Return: presents a broader picture of the company beyond mere numbers (products, growth strategies,...)

(Sometimes these terms are used interchangeably, but they really aren't the same.)