1. 2009 Seminar for the Appointed Actuary Friday September 18, 2009 MATERIALITY Colloque pour l’actuaire désigné 2009 2009 Seminar for the Appointed Actuary Friday September 18, 2009 MATERIALITY Colloque pour l’actuaire désigné 2009 Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. Page 1 Canadian Institute of Actuaries Standards of Practice  SOP 1340.03 Materiality  “Material has its ordinary meaning, but judged from the point of view of a user, having regard for the purpose of the work.”  “Thus, an omisson, understatement, or overstatment is material if the actuary expects it materially to affect either the user’s decision making or the user’s reasonable expectations.” 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

3. Page 2 Reflecting Upon Materiality : User is Key  Intended User : includes principal  Unintended User: although not responsible for, may be found to retain some responsibility to assure that a report is not misused or misapplied.  The actuary would report the purpose of the work as precisely as possible so that any user is warned of the risk of using the work for a different purpose with a more rigorous standard of materiality.  Summary: the actuary who prepares the work is expected to take reasonable steps to ensure that the work does not mislead the intended users of the work. 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

4. Page 3 Determination of Materiality Level  Different practices  Some have a separate materiality for data (small) than for the organization in total.  Most common, one single materiality level.  Should be reasonably stable (not vary greatly from year to year or valuation to valuation) 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

5. Page 4 Materiality Considerations  Materiality level should be related to purpose and intended users of work  Regulatory/solvency : statutory surplus/solvency benchmark ratio  Appraisal work : net worth/net income/eps  DCAT : less rigorous than valuation work  Financial Statement work : net income/net capital 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

6. Page 5 Materiality Considerations  Materiality level expected to vary according to other characteristics of entity  Size of entity  Entity’s access to capital  Stage of organizational life cycle  Type of business  Net retention 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

7. Page 6 Materiality Considerations  Materiality level for work involving a threshold expected to become more rigorous as the entity approaches that threshold. 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

8. Page 7 Accounting vs Actuarial Materiality  Some would argue that, at least in theory, the materiality level selected by the actuary would normally be close to that selected by the accountant or auditor.  Communication regarding materiality is expected between the actuary and the auditor. 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

9. Page 8 Communication and Disclosure  Main factor underlying the selection of a materiality level has been the impact on the user.  Actuary would consider some disclosure regarding the materiality level within the actuarial work product.  Must take into account the complexity of the concept of materiality, the potential importance of the concept to the user, as well as the sophistication of the user who will be receiving the work product. 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

10. Page 9 Materiality In Practice : AAR  0.5% of gross policy liabilities  1% of gross unpaid claims  5% of net unpaid claims  10% of net income  0.75%-1% of assets  2.5% of surplus or equity  2.5% of net earned premiums  1% net unearned premiums  Same as auditor 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009

11. Page 10 Materiality In Practice : DCAT 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009  2%-5.5% of surplus or equity  Sum of 2.5% of surplus and 5% of excess of assets  Same as policy liability evaluation

12. Page 11 Questions ? 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009 2009 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2009