1. 2006 General Meeting Assemblée générale 2006 Chicago, Illinois 2006 General Meeting Assemblée générale 2006 Chicago, Illinois Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Improving Actuarial Processes – Beyond AuG-43 Compliance Jacqueline Friedland, FCAS, FCIA, MAAA – KPMG LLP Neville Henderson, FSA, FCIA, MAAA – PwC LLP

3. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Presentation Outline Introduction Current environment Implications Controls Recomputation Conclusion

4. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Introduction New Audit Guideline AuG-43 Replaces old guideline AuG-15 New guideline includes “insurance enterprises” Applicable to life insurers, P&C insurers, reinsurers, and workers’ compensation boards May also be used for enterprises whose “products have similar characteristics to insurance products” Issued December 2005, effective 2006

5. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Introduction – Why the change? Auditor audits the financial statement as a whole Audit opinions do not (and cannot) express reliance on the AA’s opinion CIA/CICA Joint Policy Statement provides framework Greater consistency with US and UK GAAS Change in audit standards with respect to internal controls

6. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Introduction – Basic Principles AA is responsible for valuing policy liabilities Requirement for independent check on actuarial liabilities Requires use of audit support actuary Clarifies that AA cannot provide audit support role Requires corroborative evidence for use of AA’s work

7. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Introduction – Audit Approach Understand and test internal controls over the actuarial valuation (new) Substantive tests Test data used in valuation Review of valuation for reasonableness Testing of calculations, including consideration of complex models (new) Extent of testing dependent on: Complexity and subjectivity of estimation of policy liabilities Availability and reliability of data Nature and extent of assumptions Degree of uncertainty of future events

8. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Current Environment – Life Insurers Prior to AuG-43 – wide variance in practice Dependent on circumstances Little documentation or testing Reliance on post review Controls have not kept pace Poorly documented processes and controls Increasingly complex products AuG-43 forces Actuaries to re-examine processes & controls

9. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Current Environment Property & Casualty Insurers Not significant communication between AA and audit actuary Review of assumptions, methodology, findings Varying degree of review of calculations

10. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Implications – Life Insurers AuG-43 provides guidance on reviewing policy liabilities Address the risk of material misstatement Identify the risks and how they are mitigated Review the effectiveness of the controls Independent corroborative evidence Recomputation Recomputation is complex for insurers Improve controls to minimize recomputation

11. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Implications – Property & Casualty Insurers Requirement for documentation of internal controls and data validation procedures Requirement for more communication with AA Expect closer relationship with AA The audit actuary must test (not “do over”) the AA’s calculations Extent of recalculation depends on Nature of policy liabilities Internal control processes Difference of opinion regarding “within a reasonable range” Timing of AA work and audit actuarial specialist

12. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Controls – General Traditionally more reliance on back-end Increasingly difficult due to tighter timelines Simple trending not enough with complex products More controls on the front-end Quality control rather than correction Limited resources can focus more on analysis Three critical stages to valuation process Collection of data Complex valuation models and calculation systems Other adjustments

13. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Controls – Data I Issues – beyond usual IT controls Quality of data filters – handling of rejected data Interfaces all data transfer points Data from third parties or specialty admin systems Legacy systems and multiple admin platforms Admin may “improvise” for shortcomings in systems Handling of new products Critical information in comment sections

14. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Controls – Data II Actuaries need to capture all policy attributes that materially affect valuation Is the right information being extracted for valuation? Sufficient differentiation for complex products UL – min vs max funding Lapse experience dependent on premium features Review use of averages and approximations AuG-43 forces actuaries to review these issues and document controls

15. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Controls – Valuation Models Complex models to value complex products Commercial software vs “home-grown” models Similar control issues Different approaches to testing Set-up of valuation assumptions Check consistency between assumptions and studies Consider uncertainty in future events Reasonableness in the range

16. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Controls – Reasonability Complex models combined with complex products How do actuaries get “comfort” with result? Critical back-end checks and analysis Trending reserve / $1000 face amount Reserve roll-forward or reserve continuity Variance to plan / budget Strain at issue compared to pricing expectations Earnings by source Techniques for analyzing results have evolved but documentation may not have

17. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Controls – Adjustments Outside the Model Adjustments occur throughout the process Several types of adjustments (post model) Handling of financial statement presentation Inclusion of liabilities not modeled Known model deficiencies Significant challenge due to fewer controls Late adjustments Use of spreadsheets

18. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Controls – Spreadsheets Steps to ensure appropriateness of adjustments Itemize and track changes in adjustments Regular review of need and reasonability Limit who has ability to approve Many adjustments rely on spreadsheets Need same discipline as model Limit authority Version control Establish naming conventions Perform independent checks Document in addition to comments

19. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Recomputation Significant effort in case of most life insurance products Commercial software vs “home-grown” models Companies to perform and document “self- testing” Better controls are demonstrated then need for recomputation reduced Always some requirement for testing

20. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Conclusion Audit is more robust with improved quality of financial statements Greater consistency with other jurisdictions Forcing actuaries to document is not the point Reduce need for recomputation Hopefully identify “control gaps” and fix Improve processes before a problem occurs

21. 2006 General Meeting Assemblée générale 2006 2006 General Meeting Assemblée générale 2006 Presenters’ Contact Details Jacqueline Friedland, FCAS, FCIA, MAAA KPMG LLP (416) 777- 8320 jfriedland@kpmg.ca Neville S. Henderson, FSA, FCIA, MAAA PricewaterhouseCoopers LLP (416) 941-8437 neville.s.henderson@ca.pwc.com