Canadian Institute of Actuaries L’Institut canadien des actuaires 2006 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2006 kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors

PD-10 – AuG-43: Impact on Actuaries and Auditors Neil Parkinson, CA Chair, AASB Audit of Actuarial Liabilities of Insurance Enterprises Task Force kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors

New Audit Guideline AuG-43 Replaces old guideline AuG-15, which applied only to life insurers New Guideline includes “insurance enterprises” which include life insurers, P&C insurers and workers compensation boards Issued December 2005, effective for audits relating to years commencing after 2005 (2006 fiscal years for most) kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors

Why the change? Audit opinions do not (and cannot) express reliance on the AA’s (appointed actuary’s) opinion – auditor audits the whole financial statement Appeared to be a wide range among auditors in the extent of work applied to the work of the AA The CIA/CICA Joint Policy Statement provides a framework for the auditor and AA to use each other’s work; sometimes interpreted too broadly (as outright reliance rather than use) kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors

Why the change? cont’d Canadian audit standards (GAAS) have required less work than US GAAS, and recently, also UK GAAS – notably with respect to testing of actuarial calculations Audit standards have also changed to require audit work on a wider range of internal controls – including actuarial processes kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors

Basic principles The AA is responsible for valuing policy liabilities – the “author of the numbers” Need to ensure there is an independent check on actuarial liabilities Requires use of audit support actuary (widespread now, but not universal) Clarifies that the appointed actuary (“AA”) cannot provide the audit support role Requires the auditor to obtain evidence on accuracy of actuarial calculations kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors

Audit approach under Aug-43 Understand and test internal controls over the actuarial valuation* Substantive tests Test data used in the valuation Review of valuation for reasonableness of methods, assumptions, judgments, selections, completeness Testing of calculations, including consideration of complex models Extent of substantive testing will be affected by the effectiveness of internal controls over the actuarial valuation * New requirements of AuG-43 underlined kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors

Implementation issues Qualifications of audit support actuaries Supply of suitable actuaries Reporting deadline pressures Lack of actuarial process and control documentation Resolving audit disagreements on the valuation Duplication with peer review First time application - understanding (and misunderstandings) of the new standard kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors

Overlapping Requirements Overlapping Requirements? – Audit compared to OSFI Peer Review (Independent Review) Similarities – both cover: Reasonableness or appropriateness of methods Assumptions Reasonableness or appropriateness of the actuarial liabilities Differences: Annual audit vs. 3 year cycle Audit tests data used by the AA, and (new) also tests the calculation of liabilities Audit considers controls in actuarial processes (new) Peer review covers other opinions outside of the scope of the audit (DCAT, dividend policy, etc.) OSFI requirements becoming more detailed for peer review Practice improvement and educational objectives of peer review kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors

Understanding the new standard Does AuG-43 require the auditor or audit support actuary to independently calculate actuarial liabilities? No - the audit must test, but does not have to “do over” the AA’s valuation. In some instances (perhaps in P&C), it may be an efficient approach to do an overall recomputation, while in others, a test basis will be best. The audit must assess whether the actuarial liabilities are within a “reasonable range”. This does not mean an independent valuation by the audit, but a determination of whether any problems in the AA’s valuation are big enough to take it outside a reasonable range of estimates. kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors

Understanding the new standard How does audit materiality relate to materiality from an actuarial standpoint? (My view) – For financial statement purposes, there should be no conceptual difference. There is a CIA task force considering this issue currently, and there is a AAA paper on materiality. Materiality is not the same as the “width” of a reasonable range of estimates for actuarial liabilities, which will often be much larger than accounting materiality. kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors

Understanding the new standard What do auditors see as an error in actuarial liabilities? If the recorded liabilities are below or above a reasonable range of estimates, as a result of differences in judgment, most auditors would consider that difference an error (the amount by which it is above or below the limits of the range). Non-judgment errors can be more problematic – for example: Company books an amount different than the appointed actuary’s estimate AA makes a mechanical error, eg. use of wrong data, selection factors kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors

kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors Questions? Neil Parkinson National Director, Insurance Industry Practice KPMG LLP 416-777-3906 nparkinson@kpmg.ca www.kpmg.ca kpmg PD-10 – AuG-43: Impact on Actuaries and Auditors