Actuarial

ASSESSMENT CRITERIAFootnote 1

ROLE OF ACTUARIAL

Actuarial is an independent function, applicable only to institutions with insurance businesses, with responsibilities beyond the legal requirements of the appointed actuary that could include:

  • Evaluating the design, pricing and valuation of the insurance products offered by the institution (Pricing);

  • Assessing the reasonableness of provisions set for policy liabilities, and the appropriateness of the process followed (Valuation);

  • Reviewing models used to determine exposures (Modelling):

  • Reviewing the adequacy of reinsurance programs;

  • Analyzing stress testing results, and the process used to establish the adequacy of capital and capital planning for the institution under adverse conditions (Stress Testing); and

  • Reporting on the results of its work to Senior Management and, as appropriate, the Board.

QUALITY OF ACTUARIAL OVERSIGHT

The following statements describe the rating categories for the assessment of the Actuarial function. An overall rating of the Actuarial function considers both the appropriateness of its characteristics and the effectiveness of its performance in executing its mandate, in the context of the nature, size, complexity, and risk profile of the institution. Characteristics and examples of performance indicators that guide supervisory judgement in determining an overall rating are set out below.

Strong

The characteristics of the Actuarial function meet or exceed what is considered necessary, given the nature, size, complexity, and risk profile of the institution. Actuarial consistently demonstrates highly effective performance. Actuarial characteristics and performance are superior to supervisory expectations.

Acceptable

The characteristics of the Actuarial function meet what is considered necessary, given the nature, size, complexity, and risk profile of the institution. Actuarial characteristics and performance meet supervisory expectations. 

Needs Improvement

The characteristics of the Actuarial function generally meet what is considered necessary, given the nature, size, complexity and risk profile of the institution, but there are some significant areas that require improvement and may affect effectiveness in the future or under adverse conditions. Actuarial performance has generally been effective, but there are some significant areas where effectiveness needs to be improved.  The areas needing improvement are not serious enough to cause prudential concerns if addressed in a timely manner. The function’s characteristics and/or performance do not consistently meet supervisory expectations.

Weak

The characteristics of the Actuarial function are not, in a material way, what is considered necessary, given the nature, size, complexity, and risk profile of the institution and may affect effectiveness in the future or under adverse conditions.  Actuarial performance has demonstrated serious instances where effectiveness needs to be improved through immediate action.  Actuarial characteristics and/or performance often do not meet supervisory expectations.

ACTUARIAL CHARACTERISTICSFootnote 2

The following criteria describe the characteristics OSFI uses in assessing the quality of the Actuarial function’s oversight of the management of the institution’s activities and related risks.  The application and weighting of the individual criteria will depend on the nature, scope, complexity, and risk profile of the institution and will be assessed collectively, together with Actuarial performance, in rating its overall effectiveness.

Essential Elements Criteria
1. Mandate

1.1 Extent to which the function’s mandate establishes:

  1. Clear objectives and enterprise-wide authority for its responsibilities;

  2. Authority to oversee effectiveness and consistency of operating units’ actuarial practices;

  3. Authority to carry out its responsibilities independently;

  4. Right of access to the institution’s records, information and personnel;

  5. A requirement to regularly report on the effectiveness of the actuarial oversight function processes; and

  6. Authority to follow-up on actions taken by management in response to identified issues and related recommendations.

1.2 Extent to which the function’s mandate is communicated within the institution.

2. Organization Structure

2.1 Appropriateness of the stature and authority of the function head within the organization for the function to be effective in fulfilling its mandate.

2.2 Extent to which the function head has direct access to the CEO, Senior Management and the Board (or a Board committee).

2.3 Appropriateness of the function’s organizational structure.

2.4 Extent to which the function is independent of day-to-day management of risks and is not involved in revenue-generating activities or financial performance of a line of business or product line.

3. Resources

3.1 Adequacy of the function’s processes to determine the required:

  1. Level of resources necessary to carry out responsibilities and in response to changes in the institution’s business activities and strategies, as well as its operating environment;

  2. Qualifications and competencies of its staff; and

  3. Continuing professional development programs to enhance staff competencies.

3.2 Adequacy of the function’s resources and appropriateness of its collective qualifications and competencies for executing its mandate.

3.3 Sufficiency of staff development programs.

4. Policies, Practices and Methodologies

4.1 Adequacy of regular review and update of relevant policies, practices and methodologies of the Actuarial function to take into account changes in the operating environment (economic, social, industry, etc.) and in the risk appetite of the institution.

4.2 Appropriateness of relevant policies, practices and methodologies given the institution’s activities and related risks.

4.3 Extent to which relevant policies, practices and methodologies align with strategic, capital and liquidity management policies and practices.

4.4 Extent to which relevant policies, practices and methodologies are documented, communicated and integrated with the institution’s day-to-day business activities.

4.5 Adequacy of policies, practices and methodologies to model and measure the institution’s risks and actuarial provisions.

4.6 Adequacy of policies, practices and methodologies to monitor trends and identify emerging risks, and to respond effectively to unexpected significant events.

4.7 Adequacy of policies and practices to ensure that actuarial methodologies conform, or are superior to, generally accepted industry practices and current professional standards.

5. Reporting

5.1 Adequacy of policies, practices and methodologies to report identified issues along with recommendations to management of business units and, as appropriate, Senior Management and the Board.

5.2 Adequacy of policies and practices to monitor and follow up on the resolution of the identified issues.

6. Relationship with Risk Management

 

6.1 Extent of linkages, harmonization and coordination of actuarial policies, practices and methodologies with the institution’s risk management function, systems and processes.

6.2 Adequacy of the Actuarial function’s contribution to the effectiveness of the institution’s risk management function, systems and processes.

6.3 Adequacy of the on-going communication between the Actuarial function and other organizational units involved in the institution’s risk management function, systems and processes.

7. Internal Audit Oversight

7.1 Extent to which the Internal Audit program includes reviews of the Actuarial function and its key controls, it has appropriate resources to carry out the reviews, and the scope and frequency of its reviews are sufficient to assess effectiveness of the Actuarial function.

7.2 Adequacy of Internal Audit’s communication of its recommendations and follow-up with respect to the Actuarial function.

8. Senior Management Oversight

8.1 Adequacy of policies and practices for the Board (or Board Committee) to approve:

  1. The appointment, performance review, compensation and succession plan of the head of the function;

  2. The function’s mandate, budget and resources (staffing and skill sets); and

  3. The function’s annual work plan including any material changes to that plan.

8.2 Adequacy of policies and practices to assess the effectiveness of the function, including communicating results to Senior Management and, as appropriate, the Board (or a Board committee).

8.3 Adequacy of policies and practices to report periodically to Senior Management on issues and recommendations with escalation to the Board, as appropriate

8.4 Adequacy of the processes related to talent development and succession planning for function key roles.

9. Board (and Board Committee) Oversight

9.1 Adequacy of policies and practices for the Board (or Board Committee) to approve:

  1. The appointment, performance review, compensation and succession plan of the head of the oversight function;

  2. The function’s mandate, budget and resources (staffing and skill sets); and

  3. The function’s annual work plan including any material changes to that plan.

9.2 Extent to which the Board (or Board Committee) receives periodic reporting on trends or pervasive risk impacting the organization.

9.3 Extent to which the Board (or Board Committee) demonstrates an ability to act independently of Senior Management through practices such as regularly scheduled Board (or Board Committee) meetings that include sessions without Senior Management present.

10. Relationship with Other Oversight Functions

10.1 Adequacy of the formal integration of the Actuarial function’s role and defined responsibility with other oversight functions as appropriate.

ACTUARIAL PERFORMANCE

The quality of the Actuarial function’s performance is demonstrated by its effectiveness in overseeing the identification and management of risks and provisions.

OSFI’s assessment will consider the effectiveness with which the Actuarial function: 1) anticipates and identifies risks and measures provisions in a dynamic operating environment and 2) provides analysis to assess, and support, the management of those risks within the institution’s limits.  OSFI will look to indicators of effective Actuarial function performance to guide its judgement in the course of its supervisory activities.  These activities may include:

  1. discussions with directors and management, including the Chief Risk Officer;

  2. assessment of the Actuarial function’s oversight activities and how particular issues are raised and decisions made, such as adequacy of provisions;

  3. review of Actuarial reports and reports of independent assessments of the function;

  4. review of Board or Actuarial committee minutes, etc.

Examples of indicators that OSFI may use to guide its supervisory judgement include the extent to which the Actuarial function:

  1. Proactively updates its policies, practices and methodologies in response to changes in the industry and in the institution’s strategy, business activities and risk limits and appetite;

  2. Proactively ensures that actuarial work complies with standards of professional practice and approved methodologies;

  3. Integrates its policies, practices and methodologies with day-to-day business activities and with the institution’s strategic, capital and liquidity management policies;

  4. Models and measures key risks and actively participates in the development of new initiatives to ensure processes are in place to appropriately identify, measure and mitigate risks prior to implementation;

  5. Uses actuarial and risk measurement and monitoring tools that are sensitive enough to provide early warning indicators of adverse trends and conditions; proactively analyzes these trends and conditions; and follows up to ensure that they are addressed on a timely basis;

  6. Proactively and effectively addresses actuarial issues identified as a result of internal or external events, or by other control functions;

  7. Provides regular, comprehensive reports to Senior Management and, as appropriate, the Board  on the results of the activities of institution’s Actuarial function;

  8. Proactively follows up to ensure that significant issues are identified and addressed on a timely basis; and

  9. Provides transparent disclosure of actuarial methods and assumptions supporting its reporting.

Footnotes

Footnote 1

The Assessment Criteria should be read in conjunction with OSFI’s Supervisory Framework.

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Footnote 2

Examples of documentation that OSFI may review in formulating its assessment of the characteristics of the Actuarial function include organizational charts, mandates, job descriptions, core competencies and personnel profiles; Actuarial policies, authorities and limits; systems documentation and testing; new product and initiative framework; and reports prepared for Senior Management and the Board (or a Board committee).

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