The Role of the Professional Advisor – The View from Canada

Dave Pelletier

Rotorua, 2002.11.14

An opening perspective

Post-Enron, a widely-shared perspective that “principles-based” rather than “rules-based” approaches preferable

An opening perspective

Post-Enron, a widely-shared perspective that “principles-based” rather than “rules-based” approaches preferable

BUT Principles-based approaches work only with

people who have principles!

How do we in Canada support the actuary in his professional role?

Standard-setting The role of the Appointed Actuary Discipline Peer review

Setting standards – the insurer example

Based on first principles, not arbitrary formulas For all insurance products, PV of benefits and

expenses less PV of premiums, reflecting all elements Current, meaningful, updated assumptions and terms

for ALL business, both new and in-force Results in a largely meaningful, realistic balance sheet,

understandable and usable by policyholders, stockholders, analysts, and regulators

The vital role of the Appointed Actuary

Opinion on solvency, not merely on technical calculations

Formal reliance by the auditor and the actuary on each other’s work

Standards promulgated by the CIA on setting “best-estimate” assumptions and PfADs (Provisions for Adverse Deviation)

The vital role of the Appointed Actuary –checks and balances

Very detailed annual report to the regulator– the assumptions and methods utilized, including

justification, changes, and any deviation from CIA standards

– key risks– asset-liability management

Mandatory external peer review Whistle-blowing responsibility of the AA

Discipline

Rules of Conduct (including “Rule 13”), at www.actuaries.ca/publications/2001/20163e.pdf

A well-defined disciplinary process, at www.actuaries.ca/publications/2001/20120e.pdf

Publicity

The process

Complaint or inquiry Decision on

investigation Investigation Decision to drop or

charge

If charge, one of:– private admonishment– fast track– disciplinary tribunal

(and possibly appeal tribunal)

Public notice in latter two cases

Annual discipline bulletin

Statistics Educational illustrative cases (confidentiality

preserved where private admonishment or no charge)

Reasonably detailed summary (up to 6 pages), with names, where found guilty

Statistics 1992 to 2002

Inquiry/complaint but no IT: 37 (2 currently) IT but no charges: 23 (5 currently) Private admonishments: 1 Fast track: 6 Disciplinary tribunals: 11 (2 currently) A flurry early on, but fewer cases recently

Results of disciplinary tribunals

Guilty (10):– Fines and/or costs from

$5,000 to $150,000– Suspensions from 1

month to 3 years– Prohibition to practice in

particular area– One expulsion

Not guilty– 1 totally– Some others on some of

the charges

Appeals– 1 verdict / penalty

unchanged– 1 penalty reduced

Peer review

A controversial item – under development since 1995!

Originally suggested by OSFI Importance due to:

– long-term nature of our work– sensitivity to our assumptions (both insurance and

pension)– protection of the ultimate (trusting) customer– “oversight” boards now being placed over the

accountants

Peer review objectives

Continuous improvement in quality of work Strengthened public confidence Education of both practitioner and peer

reviewer Reduced risk of error Feedback to the CIA, to assist in:

– development of standards of practice– determination of acceptable ranges of practice

Peer reviewer to consider:

Purpose and scope Procedures for

supervision of what not personally performed

Assumptions and methods

Quality of the wording Clarity of communication

Completeness Reasonableness of

results Procedures to verify data

integrity Procedures to ensure

calculation accuracy Materiality

Other aspects of peer review

Peer reviewer to be seen, by the user, as competent and objective

Where complex annual work, can spread over three years

Idea not to reproduce calculations, but rather to review controls, procedures, conclusions

Written opinion that the work performed in accordance with acceptable actuarial practice

Not compulsory. Outlines what required where requested by a user of an actuary’s work. Concerns by some pension actuaries

Peer review requirement by OSFI

Peer review required for Appointed Actuary work on liability and solvency margin calculations, participating policy calculations, and DCAT

Pre- or post-release of report itself Three-year cycle acceptable Definitions of “competent” and “objective”; eg:

– same requirements as to be an Appointed Actuary– cannot be in same company or same consulting firm

And so ...

Not a “trust me” philosophy But instead

– a meaningful financial reporting basis– a heavy reliance on the good sense, judgement,

training, and experience of the actuary– supported by a rigorous, detailed set of professional

standards– supplemented by a system of checks and balances

put in place by the regulator and the profession