Considerations for financial condition testing in 2020 given the COVID-19 pandemic

This article originally appeared on the CIA COVID-19 Hub.

By Michelle Lindo, FCIA, Chair of the Committee on Risk Management and Capital Requirements

This article reflects the opinion of the author and is not official guidance of the CIA. The author welcomes feedback on this article and suggestions for future articles, and invites CIA members to regularly visit the CIA COVID-19 Hub for thought leadership.

Which items should we pay special attention to in the FCT this year given that we are in the midst of the COVID-19 pandemic?

Adjustments to the base scenario

Typically, the base scenario is based on the business plan. It is possible that the business plan does not yet reflect any adjustments for COVID-19. Depending on the timing of the report and the potential impact to the insurer, the base scenario could be updated to reflect the immediate economic impacts of the pandemic: e.g., equity shock, reduction in risk-free rates, widening of corporate spreads. As experience emerges in 2020, the impact on insurance claims and any observed changes in persistency and new business volumes could be reflected to strengthen the report’s findings. To the extent that these observations are expected to persist beyond 2020, adjustments could also be made to future years in the projection period.

If the base scenario is ultimately different from the business plan, the changes made should be documented in the FCT report.

Timing of the report and presentation

According to the Standards of Practice (SoP), the Appointed Actuary would ensure that the FCT investigation is current and that recent events and operating results are reflected up to the date of the report. The SoP goes on to say that if an adverse event occurs between the date of the report and the date of the presentation to the board or chief agent, then the actuary would, at a minimum, address the event and potential implications on the investigation. If appropriate, the actuary would redo the investigation. Finally, if circumstances have changed significantly since the last investigation, then the actuary may consider preparing an immediate, off-cycle report. The CRMCR educational note highlights the SoP requirements with respect to updates to the FCT investigation.

For example, the table below illustrates a few scenarios and potential actions:

Date of investigationPlanned date of reportPlanned date of presentationPotential impact of COVID-19Potential action
December 31, 2019March 1, 2020March 27, 2020Unknown full extent. However, financial markets are volatile in Q1, and the stock market has declined by 30% and risk-free interest rates have declined by 100 bps. Q1 results are not yet available.Address the uncertainty in the presentation to the board/chief agent. Could refer to any current or past investigations on pandemics, other exogenous events or economic shocks. Potentially schedule a follow-up presentation for later in the year. 
December 31, 2019April 30, 2020May 15, 2020Unknown full extent. Economic impacts felt in Q1 and Q1 results will be available before the presentation.Consider updating the report to reflect Q1 results of material. Alternately, the report could be delayed to allow additional analysis and increased relevance. Could focus on any current or past investigations on pandemics. Potentially schedule a follow-up presentation for later in the year. 
December 31, 2019September 30, 2020October 15, 2020Q1 and Q2 results are available, and reflect economic shocks and some adverse mortality claims experience. Insurer has remained above internal targets during the course of the year.Add additional commentary to the report to reflect the recent changes and/or update the base scenario to reflect Q1 and Q2, and expectations for Q3. Additional adverse claims activity over the projection period could be reflected in the base and/or scenarios. 
December 31, 2019November 1, 2020November 30, 2020In Q1, insurer temporarily falls below internal target due to the economic shocks. Mortality and morbidity exposure are high.Consider moving up the FCT investigation to earlier in the year given the Q1 out come to provide a more relevant and timely investigation. Focus on possible outcomes of the pandemic and potential corrective management actions.

This is the last article of a practice-specific article series under the Actuarial Guidance Council. Read the first article and the entire series.

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