This article originally appeared in the CIA (e)Bulletin.
By Trevor Howes, FCIA
This article is a shortened version of a technical article that was published on February 5, 2020. The full article is available via the IFRS 17 member-only blog (login required) and on the CIA website.
IFRS 17 – Insurance Contracts, the new accounting standard currently expected to become effective for Canadian insurers in 2022, presents fundamentally new approaches to methodology, assumptions, and reporting and disclosure requirements. The profession, however, must also assess the potential impact beyond the practical considerations of mere compliance with IFRS 17. This impact touches on the overall authority of the individual actuary and the professional guidance that he or she must follow to select methodology and assumptions used in the valuation, and on the broader role of the actuary as established by Canadian law and by the corresponding regulatory frameworks, both federal and provincial.
Prior to the adoption of IFRS in Canada, the actuarial profession was recognized by both the accounting profession in Canada and by regulators as having the primary responsibility to determine valuation methodology and the approach to the assumptions required for appropriate actuarial liabilities, which were used for both audited public financial statements and regulatory reporting. This single valuation for dual purposes has been long accepted as a unique strength of the Canadian regulatory framework.
Current Canadian actuarial Standards of Practice (SOP) include guidance that covers not only the valuation itself but the appropriate opinion wording to be used in reporting on that valuation and describing the role of the actuary in the valuation. The opinion wording conveyed strong messages about the actuary’s compliance with accepted actuarial practice, including specific statements about the selection of appropriate assumptions and methods, that the valuation has made appropriate provision for all policy obligations, and that the financial statements fairly present the results of the valuation.
A dilemma for the profession
The Canadian actuarial profession is now presented with a dilemma. Under IFRS 17, the actuary will be tasked for the first time with performing a valuation in which the methodology and the approach to assumptions, and the overall accounting framework driving the financial statements, are controlled by an independent party, the International Accounting Standards Board (the Board). As such, IFRS 17 imposes accounting principles on the valuation that were not explicitly designed from an adequacy point of view, at least as understood by actuaries in Canada.
Yet the formal role of the Appointed Actuary in Canada as defined in the Insurance Companies Act (ICA) will still require a report and presumably a standard opinion on the results of the valuation, as well as opinions related to other components of the actuary’s role, and the ICA still requires that the valuation of policy liabilities be in accordance with accepted actuarial practice. Accordingly, fundamental questions have to be answered about how to continue this historic multifaceted role under IFRS 17, and, most urgently, how the responsibility of the actuary for the total policy liabilities is construed given these changes.
Recommendations from the Designated Group
To respond to these questions, a new Designated Group (DG) was formed by the Canadian Actuarial Standards Board (ASB) in 2018 with the mandate to review existing guidance related to the responsibilities of the Appointed/Valuation Actuary in Canada (i.e., considering both federal- and Quebec-regulated entities, whether life and health or property casualty) and to identify and recommend any changes required as a result of IFRS 17.
The DG has concluded that the actuary could not justify a professional opinion about the adequacy of the total amount of the policy liabilities calculated under IFRS 17 without significant independent testing at every reporting date. However, it is also of the opinion that the actuary can play a valuable role both in financial reporting and in meeting the expectations of the regulators with respect to solvency protection by adjusting the opinion to focus on the financial reporting purpose of the valuation under IFRS 17 and by appropriate strengthening of professional guidance related to the other components of the statutory role.
An exposure draft in 2020
This DG has now recommended, and the ASB has approved, a Notice of Intent to review the SOP and prepare further changes to selected sections of Canadian standards of practice that relate to the role of the actuary and how it is communicated to the public. An exposure draft of changes to the SOP arising from the DG’s work is expected by mid-year 2020.
It is important that Appointed/Valuation Actuaries in Canada be aware of the direction being taken by the DG as reflected in the NOI, and provide comments and feedback as appropriate on the NOI and on the resulting drafts of new SOP.
While the final impact of IFRS 17 is still not clear, it is certain that many things will change under this new accounting standard, and the actuary will certainly need to work closely with accounting professionals to produce quality financial statements, incorporating the new presentation paradigms and satisfying increasing demands for detailed disclosures. At the same time, the actuary will continue to play a vital role in assuring the public and regulators about the risk of future uncertain events, the sufficiency of company surplus to meet those risks, and the possible ways to mitigate those risks. As a profession, we must work to understand how that role can be properly supported in an IFRS 17 world.
Trevor Howes, FCIA, is Vice-Chair of the Designated Group on the Impact of IFRS 17 on the Role of the Appointed/Valuation Actuary.
This article reflects the opinion of the author and does not represent an official statement of the CIA.