IFRS 17 Life Memorandum to the Appointed Actuary - 2023

A. General Requirements and Directions

A.1 Overview

This Memorandum describes the requirements of the Office of the Superintendent of Financial Institutions (OSFI or Superintendent) with respect to the Appointed Actuary’s Report (AAR) specified in subsection 667(2) of the Insurance Companies Act (ICA). It sets out the minimum standards used in determining the acceptability of the AAR and provides guidance for the Appointed Actuary preparing reports in matters relating to presentation, level of detail and nature of the discussions to be included.

Many insurers are required to file an AAR, as part of the Annual Return forms, with more than one regulator, federal or provincial, in Canada. The insurer is responsible for ensuring that the AAR submitted as part of the Annual Return to each regulator complies with the requirements of that regulator.

The term AAR refers to the detailed actuarial report submitted to a regulator. This includes the opinion of the Appointed Actuary concerning the appropriateness of the actuarial and other policy liabilities included in the insurer's financial statements, detailed commentary, data exhibits and calculations supporting that opinion.

The actuary must opine on the actuarial and other policy liabilities included in the insurer’s financial statements, as defined in the Insurance Companies Act, regardless of the accounting standard under IFRS (typically IFRS 9, IFRS 15 or IFRS 17). These could be related to: (re)-insurance contracts issued, reinsurance contracts held, investment contracts with discretionary participation features (DPF) investment/service components, investment contracts, or service contracts.

The AAR comprehensively documents the work done by the Appointed Actuary to calculate the actuarial and other policy liabilities. The AAR also documents the work with respect to the administration of Participating Accounts and provides a summary of asset/liability practices. OSFI views the AAR as a key component of its review of the insurer’s financial position and profile.

The AAR is not solely a report from the insurer’s Appointed Actuary to OSFI’s actuaries. It is also intended for entity management and is read by regulators who may not be actuaries but who are knowledgeable about insurance. Therefore, the AAR should be presented in a manner generally understandable to both entity management and the regulator.

A.1.1 Reconciliation to Corresponding Annual Return Liabilities

Subsections 365(1) and 629(1) of the ICA require the Appointed Actuary to value the actuarial and other policy liabilities. These amounts are covered by the Appointed Actuaries Opinion and are reported in the AAR.

Tables require the consolidated liabilities amounts to be reported unless they are specified. The Appointed Actuary should confirm that the consolidated liabilities at an entity level reported in the AAR are reconciled to the numbers reported in the Quarterly and Annual Life Returns.

A.2 Regulatory Requirements

A.2.1 Application of Professional Standards to the Appointed Actuary's Valuation

Subsections 365(2) and 629(2) of the ICA require that: “The actuary’s valuation shall be in accordance with generally accepted actuarial practice with such changes as may be determined by the Superintendent and any additional directions that may be made by the Superintendent.”

OSFI's Guideline E-15 Appointed Actuary: Legal Requirements, Qualifications and Peer Review describes the role of the Appointed Actuary and sets out some of OSFI's expectations with respect to that role. The guideline also outlines the Actuary's qualification required to carry out the Appointed Actuary's role.

The Appointed Actuary should disclose when the educational notes published by the Canadian Institute of Actuaries (CIA) are not followed as well as the supporting rationale.

For purposes of the Appointed Actuary’s valuation of the actuarial and other policy liabilities, OSFI currently accepts that work performed in accordance with “accepted actuarial practice” in Canada (as defined by the CIA) is sufficient to satisfy the ‘generally accepted actuarial practice’ requirement referred to in the ICA sections identified above. “Accepted actuarial practice” is defined in the professional actuarial Standards of Practice of the CIA, augmented by the additional requirements and directions of this Memorandum. Any deviations from CIA Standards of Practice or from the additional requirements of this Memorandum must be reported in the AAR and justified.

This Memorandum for 2023 fiscal year-end IFRS 17 financial reporting does not contain any requirements that override or limit accepted actuarial practice.

In complying with accepted actuarial practice, the Appointed Actuary must meet a standard of care with respect to the data used in valuations. This standard of care, implicitly stated in the CIA Standards of Practice, requires the Appointed Actuary to establish suitable check procedures for the verification of data. The Appointed Actuary should describe the data verification that was performed. The CIA Standards of Practice (SOP) Subsection 1520 offers the Appointed Actuary the option to consider the Auditor’s work. The AAR must discuss the extent to which the Appointed Actuary considers the work of the Auditor. Where the Appointed Actuary uses the work of the Auditor, the details of the Auditor’s work should not be addressed in the AAR. If there are instances where the Appointed Actuary does not use the work of the Auditor because of any special circumstances, this must be disclosed in the product sections of the AAR.

The CIA SOP Subsection 1510 describes the Appointed Actuary’s use of another person’s work. Such use of the work of others should be disclosed in the section of the AAR where it most logically applies (for example, at the entity level, a specific product level, etc.).

A.2.2 Filing Directions for the AAR, FCT Report and Peer Review Report

The filing deadlines for the above reports are:

• AAR including the AAR supplementary tables – 60 days after the end of the fiscal year,
• FCT Report - the earlier of 30 days after the presentation to the Board of Directors, Audit Committee or Chief Agent and one year after the fiscal year end,
• Peer Review Report (full 3-year review or the limited annual review) - Copies of pre-release reports, both the full peer review report, and any summary, for financial statement work should be forwarded to OSFI based on the same deadlines that apply to filings of the Life regulatory financial returns. For post-release reviews, the reviewer’s report should be submitted to OSFI no later than thirty days after release of the Appointed Actuary’s report on the work reviewed, and for future financial condition reports, no later than December 31.

OSFI’s Guideline E-15 Appointed Actuary: Legal Requirements, Qualifications and Peer Review provides more details on filing deadlines.

For the AAR, the FCT Report and the Peer Review Report, the insurer must submit one electronic copy uploaded via the Regulatory Reporting System (RRS). A copy of the signed opinion must be included in the electronic submission. Failure to meet the deadlines for the filings will result in a penalty fee under OSFI’s Late and Erroneous Filing Penalty Framework.

For security reasons, insurers should not file reports through e-mail. For the AARs, the FCTs and the Peer Review Reports the insurer is required to submit:

• One electronic copy uploaded to a secure web portal;
• Word or pdf format, with pdf preferred;
• One electronic copy of the required Supplementary Life tables in Excel format; and
• Note: No hard copies are required, with the exception of some insurers for the AAR. Insurers required to provide hard copies will be contacted individually.

Insurers should follow the file naming conventions outlined in the instructions for Unstructured Financial Returns.

Instructions on the use of the web portal can be found on OSFI website under Regulatory Data and Returns / Filing Financial Returns / Canadian & Foreign Life Insurance Companies/Fraternal Benefit Societies.

In order to file a Peer Review Report within RRS, insurers are reminded that these filings must first be requested by contacting ReturnsAdmin@osfi-bsif.gc.ca or by calling 613-991-0609.

The ICA requires insurers to file their AAR with their Annual Return. OSFI will not accept a certificate containing only the opinion of the Appointed Actuary in lieu of a full AAR.

Note that in Section B.8.4 there is a requirement for a separate cover letter for Disclosure of Compensation.

A.2.3 Filing Directions for the Supplementary Table

When filing the AAR, the Appointed Actuary must complete and submit the file “Life AAR Supplementary Tables”. In particular, the tables must not be modified by adding rows or columns. The Appointed Actuary must ensure that all tables are completed in the stated format. Column headings should not be changed or reordered. If no data is available, cells should be left blank. If changes are required to the workbook, the insurer is asked to send the request to AARinquirylife@osfi-bsif.gc.ca.

A.3 OSFI's Review Process

OSFI recognizes the confidential nature of the AAR. Reviews of the filed Annual Returns may disclose that an Appointed Actuary’s valuation warrants further assessment and questioning. The Superintendent may reject assumptions and methods where it appears that the actuarial and other policy liabilities produced are inappropriate.

Since the review of an AAR may take place over an extended period after filing, OSFI may request the Appointed Actuary to provide supplemental detail to sufficiently assess the assumptions and methods. The Appointed Actuary is expected to respond promptly to all supplemental requests. Documentation required to support the computation of the actuarial and other policy liabilities reported in the Annual Return and the AAR should be available at all times and should be made available to OSFI upon request.

Where the appropriateness of particular assumptions or methods is not sufficiently demonstrated, the Superintendent can require the Appointed Actuary to choose other acceptable assumptions or methods, and to re-compute the actuarial and other policy liabilities. In such a situation, the Appointed Actuary must re-file the AAR. The Superintendent may also require the insurer to amend the Annual Return. Alternatively, the Superintendent may ask the insurer to reflect the changes in the Annual Return for the following year. The Superintendent may request a report from an Independent Actuary.

B. General Layout

The format and order of presentation specified in this Memorandum must be followed. The report is ordered so that summary total entity information is presented first. This should give the reader an overview of the entity’s actuarial and other policy liabilities. The data should be ordered to be consistent with, first, the way that the entity is reported externally and, second, the way that the entity is managed, analyzed and reported internally.

A uniform manner of presentation allows OSFI to compare methodologies and assumptions more easily between entities. Even if a section is not applicable to an insurer, it must still be included in the report.

B.1 Overview

B.1.1 Overview of the Entity

The overview section of the AAR should include:

• a brief description of the entity’s structure;
• an overview of its operations;
• any changes in structure;
• any acquisitions/divestitures;
• any key material events affecting the actuarial and other policy liabilities;
• any changes in the philosophy towards the valuation of the actuarial and other policy liabilities; and
• any material new categories of business.

While the above should be disclosed in the overview section of the AAR, insurers should disclose any extensive product specific details in the appropriate product sub-sections.

B.1.2 Opinion

The Appointed Actuary must use the prescribed opinion format (see Appendix I). The opinion wording is as recommended in the CIA Standards of Practice – Practice-Specific Standards for Insurers. OSFI will consider any opinion that varies from this wording to be a qualified opinion.

This section must contain an original signature of the Appointed Actuary, the Appointed Actuary’s name (printed), the date and location of signing.

The actuarial opinions presented to the shareholders and policyholders of the entity should be essentially the same as the opinions filed with OSFI. Should this not be the case, the Appointed Actuary must disclose in writing in the AAR to OSFI the material differences between the opinions, as well as the rationale for such differences.

Any qualification or limitation concerning any aspect of the valuation should be noted in this section of the AAR. These qualifications or limitations should be similar to the ones included in the opinion for Canadian Annual Returns presented to the shareholders and policyholders.

B.1.3 Materiality Standards

In preparing the insurer’s Annual Return, the entity management and the external auditor routinely agree on a level of materiality. The AAR must report the materiality standard. In addition, the Appointed Actuary must report on how the materiality standard is selected in the valuation of actuarial and other policy liabilities.

B.2 Total Consolidated Entity Data

B.2.1 Summary Reporting of Consolidated Data

The Appointed Actuary must complete the following summary tables of the accompanying Supplementary Table Spreadsheet:

• Table 2.1a Consolidated Liabilities/Assets for (Re-)Insurance Contracts Issued, Reinsurance Contracts Held and Investment Contracts with DPFs by Portfolio and by Groups of Contracts
  • Groups of contracts must be separately shown for the following levels as in paragraph 16 of IFRS 17:
    • Groups of contracts that were onerous at initial recognition,
    • Groups of contracts that had no significant possibility of becoming onerous at initial recognition, and
    • Other groups of remaining contracts

    If the entity was subdivided into more groups, the Appointed Actuary should map these groups to one of the three groups above. If a portfolio has multiple groups, then more than one entry in this table must be filled in. For example, if a portfolio has a group of contracts that are onerous and a group of remaining contracts, then two entries would be filled in this table.

• Table 2.1b - Consolidated Liabilities/Assets for (Re-)Insurance Contracts Issued, Reinsurance Contracts Held and Investment Contracts with DPFs by Portfolio and by Product Type
• Table 2.2a - Risk Adjustment for Non-Financial Risk by Risk Where Margin Approach is Used – (Re-)Insurance Contracts Issued and Reinsurance Contracts Held Only
• Table 2.2b - Risk Adjustment for Non-Financial Risk by Risk Where Other Approaches (i.e. other than margin approach) are Used – (Re-)Insurance Contracts Issued and Reinsurance Contracts Held Only
• Table 2.3a - Assumption and Methodology Changes Related to Non-Financial Risk – (Re-)Insurance Contracts Issued and Reinsurance Contracts Held Only
• Table 2.3b - Assumption and Methodology Changes Related to Financial Risk by Quarter – (Re-)Insurance Contracts Issued and Reinsurance Contracts Held Only. Examples of assumption and methodology changes include, but not limited to, a change in the interpolation method to grade from the last observable rate to the ultimate rate in the discount curve; a change in the approaches/methods or assumptions used to develop the discount curves (for example a change in developing the illiquidity premium); a change made to a stochastic modeling used for valuation; other change in methodology (such as arising from an improvement in valuation systems or a refinement of methodology);
• Table 2.3c - Changes Related to Market Impacts by Quarter - (Re-)Insurance Contracts Issued and Reinsurance Contracts Held Only. The market impacts include, but not limited to, change in risk free rates, credit risk premiums, currency exchange rates, etc.

  The following minimum levels of detail must be followed for these tables:

  • Country: If an entity operates in more than one country, the data must be shown separately for each country, since in some cases there are local restrictions on the movement of assets and liabilities out of a country.
  • Entity: Data must be presented separately for each legal entity that is consolidated in the Annual Return. This is required since the assets and liabilities are in separate legal entities.
  • Par or Non-Par: Participating lines of business must be shown separately.
  • Portfolio: Data must be presented separately for each portfolio of (re-) insurance contracts issued or reinsurance contracts held.
  • Product Type: The definition of product type for the purpose of reporting in the AAR should be determined by the Appointed Actuary based on the circumstances of the insurer. Product type should be reported separately in the AAR consistent with how the products are managed in the portfolio.

B.2.1 (i) Instructions for Filling the Tables in the Accompanying Supplementary Tables Spreadsheet

• The above defines a cascade of levels of reporting that must be presented in the AAR. There is no requirement to do further breakdowns of data exclusively for AAR reporting, except where this is explicitly required in this Memorandum.
• This reporting structure and format must be followed by the insurer to allow for easier comparisons between insurers. Table modification is not permitted. If any value requested is at a more granular level than the entity’s practice (for example, if contractual service margin (CSM) cannot be provided by product type level in Table 2.3a), OSFI’s preference is to use an allocation approach, and the allocation approach should be described in detail.
• For tables that request product type information (for example, table 2.1b), if a portfolio contains more than one product type, then one row per product type should be used in the table.
• The dollar amounts shown in the tables must be expressed in thousands of Canadian dollars. If the products were sold in other currency, please state, in the comments section of Instructions tab, the currency exchange rate used to convert from local currency to Canadian currency for these tables.
• Values reported at the total entity summary level must reconcile to those reported in the detailed product sections. If a product type is shown separately in Table 2.1b, the same product type must be reported separately in the detailed product sections.
• For each row with reported data, all datapoints (except the ones that are colour-coded in light yellow) must be filled for that row.
• If the value is zero, please input “0” and do not leave the cell blank. Vice versa, for any unused row, all fields in the row should be left blank.

B.2.2 Summary Reporting of Risk Adjustment for Non-Financial Risk

The Appointed Actuary must complete Table 2.2a and/or 2.2b of the accompanying Supplementary Table Spreadsheet for the risk adjustment information.

Table 2.2a should report the risk adjustment by risk for the current year and prior year where the margin approach is used or if an insurer uses the margin approach to replicate the aggregate risk adjustment derived from other approaches (other than the margin approach). The Appointed Actuary should describe how diversification benefits are included in the reported risk adjustment. If diversification benefits by product type cannot be quantified as required in Table 2.2a, entities could disclose the diversification benefits at a higher level than the product type level. The Appointed Actuary should explain why the diversification benefits cannot be quantified at the product type level specified in the table.

Table 2.2b (only required to complete this table if other than the margin approach is used to determine the risk adjustment)  should report the risk adjustment for the current and prior years.

B.2.3 Summary Reporting of Changes in Methods, Assumptions and Other Changes

Table 2.3a, 2.3b, and 2.3c show the assumption, methodology and other changes in liabilities/assets, for (re-)insurance contracts issued and reinsurance contracts held, related to non-financial and financial risks, respectively.

Multiple changes must not be netted in a manner where material changes are offset by one another and the net impact does not reflect the magnitude of the individual changes. The changes should be described at the level of granularity required in tables 2.3a, 2.3b, and 2.3c, at a minimum.

The Appointed Actuary should confirm that the total changes at an entity level are reconciled to the numbers reported in the Quarterly and Annual Life Returns.

The description of the changes shown in the tables should be succinct. Detailed descriptions of the changes must be included in the product section (Section B.4) of the AAR. Allocations are permitted when the assumption changes are determined at a higher level and the granular reporting requested poses challenges.

Each of the changes in assumptions or methodology must be disclosed separately. If more than one change is made to any of the product types, the AAR must show separately the effects of each change, i.e. netting should not be used.

Assumption and methodology changes could have an impact on CSM. The Appointed Actuary should report the full assumption and methodology change impact on CSM without reflecting the amount that goes to loss component. For example, if the CSM balance is $50 and an assumption change impact is $60, with $10 going to the loss component, then the Appointed Actuary should report the full $60 impact in Table 2.3a rather than the $50 impact on the CSM.

The Appointed Actuary should disclose the changes in (re-)insurance contract assets/liabilities by portfolio and by quarter due to market impacts such as, but not limited to, change in risk free rates, credit risk premiums, currency exchange rates, etc. in Table 2.3c.

B.2.4 Portfolio Mapping

The Appointed Actuary must complete Table 2.4 of the accompanying Supplementary Table Spreadsheet for information related to each portfolio. For Column (21) to (26), the Appointed Actuary should indicate the years of issued contracts (for example, pre 2017, pre 2018, 2017-2022, 2018-2022, etc.) with respect to the transition methods selected for that group of contracts. The Appointed Actuary should disclose all the transition approaches if there are multiple transition approaches.

B.2.5 Liabilities for Investment and Service Contracts

The Appointed Actuary must complete Table 2.5 of the accompanying Supplementary Table Spreadsheet for the liabilities for investment and service contracts and the liabilities for distinct investment or service component where the components are separable from the host insurance contracts.

B.3 General Valuation Information

According to paragraph 3 of the IFRS 17 standard, an entity shall apply IFRS 17 to:

1. insurance contracts, including reinsurance contracts, it issues
2. reinsurance contracts it holds; and
3. investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts.

Sections B.3 and B.4 apply to these contracts only.

B.3.1 Level of Aggregation

The Appointed Actuary should disclose the different levels at which (re-)insurance contracts issued and reinsurance contracts held are aggregated.

The Appointed Actuary should provide a high-level description of each of the portfolios in Table 0 under column (04) of the accompanying Supplementary Table Spreadsheet. The Appointed Actuary should explain how a portfolio of (re-)insurance contracts issued or reinsurance contracts held is classified into groups according to the degree of profitability at initial recognition using the following criteria:

For insurance and reinsurance contracts issued,

1. Groups of contracts that are onerous at initial recognition
2. Groups of contracts that at initial recognition have no significant possibility of becoming onerous subsequently; and
3. Groups of remaining contracts

For reinsurance contracts held,

1. Groups of reinsurance contracts are in net gain position at initial recognition
2. Groups of reinsurance contracts that at initial recognition have no significant possibility of becoming in a net gain position subsequently; and
3. Groups of remaining reinsurance contracts

The Appointed Actuary should explain how contracts are grouped by issue date (i.e. cohorts by issue year, quarter, etc.).

The Appointed Actuary should describe any new or changed portfolios established in the past year.

B.3.2 Construction of Discount Rates for Cash Flows that Do Not Vary with Underlying Items

The AAR must disclose the following by country and provide the rationale and sufficient information to support the inputs, assumptions and methodologies used:

• The approach(es) used to develop the discount curve (for example top-down, bottom-up, etc.)
• Whether the discount rates are expressed as spot or forward rates and the reason for the choice of presentation.

The Appointed Actuary should report the discount curves used to discount cash flows that do not vary based on the returns on the underlying items in Table 3.2a of the accompanying Supplementary Table Spreadsheet. The Appointed Actuary should disclose the discount curves by country, by currency, by liquidity category and by spot/forward basis. Under special circumstances (such as small, run-off blocks of business) where blocks are immaterial in size and of low risk, OSFI will consider different details for reporting, where appropriate. Please contact AARinquirylife@osfi-bsif.gc.ca for further discussion of these specific circumstances.

B.3.2a Bottom-Up Approach

If the bottom up approach is used, the AAR should disclose the following information in detail:

Risk-free rates by currency

• Describe the method(s) used to construct the observable portion of the risk-free curve (use of government bonds, swaps, etc.). Disclose the sources of information used to construct the risk-free rates and any adjustment(s) made to the data.
• Describe the approach(es) and rationale supporting the setting of the last observable point.
• Provide the risk-free rates by currency and year for the observable and non-observable period in Table 3.2b of the accompanying Supplementary Table Spreadsheet.
• Describe the interpolation method between the last observable point and the ultimate point, and provide the rationale for the selected method.
• Describe the technique(s) used to develop risk-free rates and rationale of the selection beyond the observable period including (but not limited to):
  1. Timing and level of the ultimate rate as well as sources of information used to set the ultimate rate.
  2. Definition of ultimate rate (i.e. spot versus forward rate).
  3. Extrapolation technique from the ultimate rate.

Illiquidity Premium

• List the types of products (Term, Whole Life, etc.) in each liquidity category (i.e. the most liquid, the most illiquid, and other category(ies) in between), and explain how this categorization is determined.
• Describe the considerations used to assess the liquidity characteristics of insurance contracts (for example product features, exit value, inherent value, exit cost, etc.) for each liquidity category.
• Describe the technique(s) used to derive the illiquidity premium in the observable period by country and liquidity category.
• Describe the interpolation method to grade from the last observable rate to the ultimate rate and the rationale for the selection.
• If the illiquidity premium curve is derived from a top-down analysis (as described in Section 4.3. of the CIA Educational Note on IFRS 17 Discount Rates for Life and Health Insurance Contracts, which is referred to as the Hybrid Approach), explain how the r factor and the constant are derived and describe the asset reference portfolio (following the disclosure requirement as described below in Section B.3.2b regarding reference portfolio) by country and liquidity category.
• If the illiquidity premium approach(es) or formulae is different from the one described in the CIA Educational Note, the Appointed Actuary should describe it in sufficient detail.
• Describe the technique(s) used to derive the illiquidity premium beyond the observable period by liquidity class including, but not limited to, the following:
  1. Timing and level of the ultimate illiquidity premium.
  2. Interpolation technique between the last observable input and the ultimate illiquidity premium, as well as the length of the interpolation period.
  3. Extrapolation technique of the ultimate illiquidity premium to the last year of future cash flows.

The Appointed Actuary should disclose any additional information pertinent to choices made in implementing the Bottom-Up approach.

B.3.2b Top-Down Approach

If the top down approach is used, the following information should be disclosed in detail:

• For each liquidity category, describe whether the entity’s own asset mix or a hypothetical asset mix is used as a reference portfolio, and explain why the selected reference portfolio is appropriate for the liquidity category.  Describe the types of assets that are expected to be included for each liquidity category, and explain the appropriateness of the choice.
• Describe all adjustments to yield curve(s) to eliminate factors that are not relevant to the insurance contracts (i.e. credit risk, market risk and/or other risk adjustments, etc.). Provide details of what factors are eliminated and the methodologies for determining the adjustments by each of the following asset classes:
  1. Corporate bonds
  2. Public equity
  3. Non-fixed income assets other than public equity (be specific of the asset classes)
  4. Other
• Describe any further adjustments to reflect the differences in liquidity characteristics of insurance contracts and the reference portfolio.
• Describe the technique(s) used to derive the ultimate rate in the unobservable period, including the timing and level of the ultimate rate as well as the sources of information used to set the ultimate rate and when is the starting of the ultimate rate.
• Describe the interpolation method between the last observable point and the ultimate point in the unobservable period, and provide the rationale for the selected method. The Appointed Actuary should provide any additional details that explain the choices made under the Top-Down approach.

B.3.2c Ultimate Rate for Business in Canadian Currency

The ultimate risk-free rate (3.65%) and ultimate illiquidity premium (0.70% and 1.5% for liquid and illiquid, respectively) of the reference curves are defined in Chapter 2 of the Educational Note: IFRS 17 Discount Rate for Life and Health Insurance Contracts published in 2022. The Appointed Actuary should explain any differences, compared to entity’s ultimate risk free rate and ultimate illiquidity premium.

B.3.3 Reference Curves for Liquid and Illiquid Categories – (Re-)insurance Contracts Issued/Reinsurance Contracts Held in Canadian Currency

The liquid and illiquid reference curves are posted on the Fiera Capital website

B.3.3.1 Construction of Reference Curves for the in-between liquidity category(ies)

If the entity has more than two liquidity categories (i.e. liquid or illiquid), the Appointed Actuary should:

• Describe how the reference curves for the in-between liquidity categories are constructed and provide details on the reference portfolios for the in-between liquidity categories, including but not limited to, its credit rating by asset type and its assets mix.
• Disclose whether the Fiera Capital data were used to derive the illiquidity premium, provide the rationale for the choice, and complete Table 3.3 of the accompanying Supplementary Table Spreadsheet.

B.3.3.2 Compare the Entity’s Discount Curves to the Reference Curves – Canadian Business Only

The Appointed Actuary should provide the rationale if the entity’s discount curves are the same as the reference curves for the liquid and illiquid categories.

Excluding the cash flows that vary with the returns on the underlying items, the following should be reported:

1. A comparison of the present value of the estimates of future cash flows, obtained using the entity’s discount curves, to the present value obtained when using the reference curves.
2. A comparison of (i) the present value of the estimates of future cash flows, obtained using the entity’s discount curves to (ii) the present value obtained when using the reference curve parameters for the unobservable period. If (ii) is greater than (i), the Appointed Actuary should disclose whether any adjustments were made to entity’s discount curves in order for (i) to be greater than or equal to (ii). If adjustments were made, the Appointed Actuary should describe the adjustments and the rationale.

The result should be reported in Table 5.1 of the accompanying Supplementary Table Spreadsheet in columns (J) to (O).

B.3.4 Expenses

The Appointed Actuary should disclose how directly attributable expenses are determined and how total entity expenses are allocated amongst acquisition, maintenance and other (refer to the examples noted per paragraphs IFRS 17.B65(f), B65(l), etc.). The information should be split by country and by portfolio. The Appointed Actuary should complete Table 3.4 of the accompanying Supplementary Table Spreadsheet, excluding annual expenses in the current year related to IFRS 9 Investment Contracts, IFRS 15 Service Contracts, and other IFRS standards (i.e. expenses that are not within the scope of IFRS17). Please note that maintenance expenses include investment expenses^{Footnote 1}. If the actual and/or expected directly attributable expenses cannot be determined based on the same calendar year information, then the Appointed Actuary should explain the timing differences between the actual and expected expenses (for example, if the actual reported directly attributable expenses are based on an expense study that does not align with the AAR calendar year reporting cycle, the Appointed Actuary should explain the timing differences.)

The Appointed Actuary should further disclose:

• The method for determining the allocations of fixed and variable overheads (such as the costs of accounting, human resources, information technology and support, building depreciation, rent, and maintenance and utilities) that are considered directly attributable to fulfilling insurance contracts;
• The method for determining the allocations of all directly attributable acquisition costs in a portfolio to groups in that portfolio, and of any acquisition costs directly attributable to any future renewals of contracts (outside the boundary of the new contracts) to future groups using a systematic, consistent and rational basis;
• The treatment of the acquisition costs for contracts with coverage period that is one year or less;
• The type of investment expenses considered directly attributable.

Insurance acquisition cash flows incurred before the recognition of their related groups of insurance contracts are held as assets. These assets will be referred to as the assets for insurance acquisition cash flows. The Appointed Actuary should disclose the results of all recoverability tests for assets for insurance acquisition cash flows that are required per IFRS 17.28E and B35D.

B.3.5 Reinsurance Contracts Held

B.3.5.1 Non-Performance Risk

The Appointed Actuary must explain how the allowance for the effect of any risk of non-performance by the issuer of the reinsurance contracts held is measured. The Appointed Actuary should indicate whether the adjustment is applied to the cash flows directly, to the discount rates, or a combination of the two.

The Appointed Actuary should detail all factors considered in the risk of non-performance by issuers of the reinsurance contracts held, including but not limited to, items such as the effect of collateral and losses from disputes.

B.3.5.2 Assumptions Used to Measure the Estimates of the Present Value of Future Cash Flows

The Appointed Actuary should disclose any reinsurance contracts held where the IFRS 17 measurement method or assumptions are different from the measurement of the underlying insurance contracts, and explain the drivers of the different methods or assumptions between the (re-)insurance contracts issued and reinsurance contracts held. The Appointed Actuary should disclose where the contract boundary of the reinsurance contracts held is materially different from the underlying direct contracts and the reason(s) for such differences.

B.3.6 Comparison with Other Reporting

The Appointed Actuary should compare the expected non-financial assumptions used in the valuation of the (re-)insurance contracts issued and reinsurance contracts held with the comparable expected non-financial assumptions used in other reporting or actuarial analysis. Comparisons include:

1. the assumptions underlying the base scenario for the FCT projections,
2. the current pricing assumptions compared to the valuation assumptions for the same blocks of new business in the current year,
3. any comparable assumptions underlying the current business plan for the entity, if applicable.

It is accepted that there could be valid reasons for any differences in expected non-financial assumptions, but if there are such differences, the Appointed Actuary must comment on the reasons.

B.3.7 Valuation System

The disclosure should include whether the valuation system is an in-house system or a commercially purchased system. Any changes in valuation systems (for example moving from an in-house system to a commercially purchased system, new valuation system, changes in providers, etc.) should be disclosed and the effects quantified. As well, the AAR should describe the results of any audit or review related to changes in valuation systems and who performed the audit or review. It should also be noted if changes in valuation systems have not been subject to audits or reviews.

B.4 Details by Portfolios and Product Lines

The subsections in B.4 are required only for contracts within the scope of IFRS 17. For contracts that are not in the scope of IFRS 17 (such as investment contracts), please describe the product at a high-level.

This section should document the portfolios and product type details of the valuation of the (re-)insurance contracts issued, reinsurance contracts held, and investment contracts with DPFs as per paragraphs 3 and 29 of IFRS 17.

This section of the AAR must follow the same order as is shown in Summary Table 2.1b. Thus, this section must follow the same cascade of country/entity/par or non-par/portfolio/(re-)insurance contracts issued, reinsurance contracts held, investment contracts with DPFs/product type.

OSFI recognizes that not all the elements that are requested to be disclosed are calculated at the same level of detail. For example, the actual to expected experience results could be at a summarized product level. 

Similarly, some of the descriptions of methodology or some assumptions may be the same for more than one product type (for example, the same mortality table is used for several product types), portfolio, or group. If this is the case, the information needs only to be disclosed once in the AAR at the appropriate summary level (i.e. aggregating information across portfolios or product types), but the detailed product sections must make direct reference to it. If reinsurance contracts held have the same assumptions as direct contracts, the Appointed Actuary should provide references to the assumptions of the direct contracts.

Each product section must be self-contained. It must have either the data within the section or an explicit reference to a specific section or page at a different summarized level. The reader of the AAR should not have to search through non-cross-referenced sections of the AAR.

If allocation method(s) is/are used for any items (for example CSM by product type), the Appointed Actuary should describe the allocation method. We expect the allocation method to be consistent year after year.

B.4.1 Portfolio Reporting

The reporting of each portfolio should include the following:

B.4.1.1 Measurement Approach

• The AAR should disclose the measurement approach for each portfolio such as,
  1. the general measurement approach (GMA), variable fee approach (VFA) or premium allocation approach (PAA) approach.
• For contracts measured under the PAA, provide explanation for:
  1. how the entity has satisfied the eligibility requirements of IFRS 17 (where applicable, provide a summary of the calculations or tests that have been performed),
  2. the method chosen to recognize insurance acquisition cash flows,
  3. the process or procedure used to determine onerous contracts, and
  4. any discount rates applied in valuing the liabilities.
• For contracts measured under the VFA, provide details on how the contracts meet the definition of insurance contracts with direct participation features.

B.4.1.2 Estimates of Future Cash flows

The Appointed Actuary should discuss the determination of the probability weighted cash flow distribution, including how this complies with the IFRS 17 Standards. For skewed distributions, the Appointed Actuary should explain what adjustments were made to the distributions to reflect extreme scenarios.

The actuary should briefly discuss any unique circumstances in determining the contract boundaries for individual products, such as term conversion.

The Appointed Actuary should discuss how the estimate of future cash flows take into account policyholder behaviour including the expected effect of anti-selection, lapses based on the returns on underlying items, etc.

For participating contracts, the Appointed Actuary should describe the approach(es) used to determine the future policyholder dividend scales assumed in the valuation, including any prospective changes in the assumed dividend scales relative to the current dividend scales.

For products with discretionary cash flows (such as participating, adjustable and universal life products), the Appointed Actuary should describe how the non-guaranteed (other than participating dividend) elements are reflected in the valuation of the (re-) insurance contracts issued and reinsurance contracts held.

For products with cash flows that vary based on the returns on underlying items, the Appointed Actuary should disclose whether the estimated cash flows are separate from cash flows that do not vary based on the returns on underlying items, and the methodology used. For cash flows that are blended, indicate the rationale for commingling.

The Appointed Actuary should discuss how future new business (not yet written) for reinsurance contracts issued and held are reflected in the estimates of cash flows.

For reinsurance contracts issued or held, the Appointed Actuary should describe how future cash flows are estimated reflecting the recapture clauses, including but not limited to, recapture fee, restrictions on recaptures, and likelihood of recapture.

The Appointed Actuary should discuss the details for the modelling of the cost of guarantees in Section B.4.2.4.

The Appointed Actuary should provide the annual estimate of future cash flows in Tables 4.1.2a, b and c of the accompanying Supplementary Tables Spreadsheet, which vary by measurement approach. The cash flows should be disclosed separately by liquidity category. If a product has both cash flows that do and do not vary with underlying items, there is no requirement to split the cash flows. If the bifurcation of the cash flows into vary and do not vary with underlying items is not undertaken, then the combined cash flows should be reported in the column “Combined cash flows that vary and do not vary with the underlying” in the table.

If any portfolio uses a stochastic approach, the Appointed Actuary should provide the estimate of future cash flows of a scenario that closely represents “CTE(0)”. For example, 1,000 stochastic scenarios are run and the CTE (0) present value of the estimate of future cash flows is $100. If scenario #60 has the closest present value of the estimate of future cash flows to CTE (0), the entity would put that scenario’s estimate of future cash flows into the table.  Cash inflows (for example, policyholders’ premium) should be reported as positive cash flows and cash outflows (for example, claims benefit) should be reported as negative cash flows in the tables.

B.4.1.2.1 Other Items to be Included in the Estimates of Future Cash Flows

For items that were separately reported as liabilities under IFRS 4 but are now included as part of the estimates of future cash flows, such as policy loans, amounts on deposit, dividends on deposit, prepaid premium accounts, experience rating refunds, claim fluctuation reserves, premium stabilization reserves, market conduct provisions, etc., the Appointed Actuary should describe how these items are included in the estimates of future cash flows (such as the methodology, models and assumptions, and if the amounts are treated as time zero cash flows) and provide the rationale to support the selected approach(es) underlying the results in Table 4.1.2.1 of the accompanying Supplementary Tables Spreadsheet.

The liabilities in Table 4.1.2.1 are not required to be reported in detail by product line. However, more details are expected to be provided in the Product Line Reporting (Section B.4.2) for liabilities that are material. In particular, the Appointed Actuary should describe in detail how the incurred but not reported claims, reported but not admitted claims, experience rating refunds, claims fluctuation reserves,  premium stabilization reserves, market conduct provisions are treated in the future cash flows. If the “other” item is significant, the Appointed Actuary should describe the specifics in sufficient detail (for example, how the incurred but not report (IBNR) provision is determined including the processes, systems, assumptions and methodologies).

B.4.1.3 Risk Adjustment for Non-Financial Risk

The Appointed Actuary should disclose the methodology chosen including the equivalent confidence level of the calculated risk adjustment. The Appointed Actuary should provide the rationale to support why the chosen methodology reflects the compensation the entity requires for uncertainty. The Appointed Actuary should describe how the confidence level is determined for the chosen methodology. The confidence level of the risk adjustment (either on a gross or net basis) for non-financial risk at both the entity-level and Canadian-level should be disclosed in Table 2.1a.

The Appointed Actuary should describe the considerations taken in quantifying the amount of non-financial risk transferred to the reinsurer.

If the entity has chosen different risk adjustment confidence levels by portfolio or other more granular levels, the Appointed Actuary should disclose the approach(es) and  rationale. If the risk adjustment is determined at a higher level than the group of contracts, the Appointed Actuary should describe the approach to allocate the risk adjustment to different levels (such as country/entity/subsidiary/branch, etc.). If the entity chooses to reflect the benefits of diversification in its risk adjustment, then:

1. The Appointed Actuary should disclose the techniques used to determine the diversification benefit, such as a correlation matrix.
2. If the entity has multiple subsidiaries and diversification is being assumed between subsidiaries, the Appointed Actuary should explain the diversification between subsidiaries.

The Appointed Actuary should describe how the discount curve, if applicable, used to discount the risk adjustment is constructed and if this discount curve is different from the one used for the associated future cash flows. The Appointed Actuary should also provide the rationale for the approach chosen. The Appointed Actuary should disclose the following information for various methodologies used to determine the risk adjustment:

Margin Approach

The Appointed Actuary should disclose how the margins for each of the non-financial risks are determined and explain the differences between current and prior year.

If crossover points are used to determine the lapse margin, the Appointed Actuary should disclose the steps used to determine the crossover points.

Cost of Capital Approach

The Appointed Actuary should disclose the projected average capital amounts, cost of capital rate and discount rates used to determine the risk adjustment at the entity level in Table 4.1.3i of the accompanying Supplementary Table Spreadsheet. In addition, the Appointed Actuary should disclose:

• The techniques used to determine the average capital amount and any adjustments made in the capital amount for calculating the risk adjustment (for example, removal of the capital component(s) related to risks other than the non-financial risk in scope of the risk adjustment.)  
• The approach and considerations in selecting the cost of capital rate. 
• How the aggregate risk adjustment is allocated amongst portfolios/group of contracts.
• The quantile techniques (i.e. VaR or CTE) used to determine the confidence level of the risk adjustment.

Quantile Techniques Approach

The Appointed Actuary should disclose:

• The approach used (i.e. probability distribution for present value of cash flows, Monte Carlo simulation or other scenario modelling) to generate the risk distribution.
• The quantile techniques (i.e., VaR or CTE) used to determine the confidence level of risk adjustment.
• How the aggregate risk adjustment is allocated amongst portfolios/group of insurance contract.

Hybrid approach

In addition to the above information required under the margin approach, the Appointed Actuary should disclose the target range for the confidence level corresponding to the aggregate risk adjustment, or the range for the target cost-of-capital rates in Table 4.1.3i if the cost of capital approach is used to calibrate margins.

B.4.1.4 Contractual Service Margin

The Appointed Actuary should discuss the approach used to determine the discount rate locked-in at initial recognition for the measurement of CSM under the GMA and the approach used to determine the interest to accrete on the CSM.

For insurance contracts with direct participation features, the Appointed Actuary should disclose how financial instruments held to mitigate risk are considered in the valuation. The Appointed Actuary should disclose whether the entity chooses the option of not adjusting the CSM for changes in the fair value of underlying items, or the fulfilment cash flows relating to future services. If the entity chooses the option, the Appointed Actuary should discuss how the conditions set out in paragraph B116 of IFRS 17 are met. If any conditions cease to be met, the Appointed Actuary should also disclose the facts and circumstances.

For insurance contracts without direct participation features, but with discretionary cash flows, the Appointed Actuary should specify the basis on which it expects to determine its commitment under the contract; for example, based on a fixed interest rate, or on returns that vary based on specified asset returns.

B.4.1.4.1 Loss Component

The Appointed Actuary should explain the key drivers of:

• the loss component for each of the groups of onerous contracts at initial recognition;
• the loss component for each of the groups of contracts for which a loss component arises at subsequent measurement; and
• subsequent changes to the loss component for each of the groups of onerous contracts.

Where a reinsurance contract held covers only a portion of the group of underlying onerous contracts, the Appointed Actuary should disclose the systematic and rational allocation method to determine the portion of losses of the onerous group that is reinsured. The Appointed Actuary should disclose how the loss-recovery component is established.

The Appointed Actuary should describe the approach used to allocate the changes in the fulfillment cash flows of the liability for remaining coverage specified in paragraph 50(a) of IFRS 17.

For insurance contracts for which the premium allocation approach is used, the AAR should  provide commentary on the facts and circumstances associated with any group of insurance contracts for which a loss component arises at subsequent measurement, and must contain the amount of the loss components on a group basis and on a portfolio basis.

B.4.2 Product Type Reporting

Within each portfolio, the Appointed Actuary must separately discuss the valuation of the products within the product types that have been disclosed in Table 2.1b.

The reporting of each product should include the following:

B.4.2.1 Product Data

The Appointed Actuary must fill out the information requested in Table 4.2.1 and 4.2.1a of the accompanying Supplementary Table Spreadsheet. The amount of liabilities must reconcile to the amounts shown in Summary Table 2.1a. The purpose of showing face amounts, account values, and annualized premiums is to give an overview of the size of the product, which may not always be understood from the size of the liabilities. Face amounts should be shown for life insurance products. Account values should be shown for universal life, segregated fund and annuity contracts. If cohorts are based on an issuing period that is less than one year, the sum of cohorts issued during the reporting period should be reported between row (19) and row (57) in Table 4.2.1 (for example, if quarterly cohorts is used then the entity should report sum of the four quarters numbers in the table).  

If any requested values are determined by allocation methods to more detailed reporting levels (such as CSM), please provide details of the allocation method(s). 

B.4.2.2 Description of Products

The AAR must include a description of the products, including key features such as guarantees, non-guaranteed or adjustable items, benefits, contract boundary, types of dividends for participating policies, etc. The level of detail in this description should be sufficient to provide information to support the methodology and assumptions used. The AAR must disclose for each product whether it is open, closed, or closed but open for new deposits.

The Appointed Actuary should discuss the key risks for each of the main product types.

For participating products, the Appointed Actuary must describe whether a contribution to participating account surplus (for example, as a percentage of premiums/dividends) is expected and the entity’s practices (if any) on changes to the contribution to surplus.

For products with minimum interest rate guarantees, the Appointed Actuary should disclose the key information pertaining to the minimum interest rate guarantees for material blocks (for example (re-)insurance contracts liabilities, account value by product, issue year and guarantee rate).

If the (re-)insurance contracts liabilities by minimum guaranteed interest rate are not available, allocation methods can be used. Please provide details of the allocation method(s) used.

B.4.2.3 New Products

The AAR should disclose details on the features of the new products, guarantees, benefits, contract boundary, etc. This description should be sufficient to support the assumptions and methodology used. Where the product is novel or experimental, and relevant experience data is not available, the Appointed Actuary should describe the work performed to measure the risk associated with these new contingencies.

For new participating products, the AAR should also disclose if the new product(s) are in the same dividend class or participating sub-account as the in force participating products. The Appointed Actuary should provide the rationale and considerations for the associated practice, and a description of how the entity ensures that inter-generational equity is maintained.

B.4.2.4 Modelling for the Valuation of Contracts with Financial Guarantees

The Appointed Actuary should disclose how the provision for financial guarantees are determined, including details such as the valuation approaches, modelling, market variables and parameters, calibration, and assumptions used to determine the market consistent valuation for insurance contracts that contain financial guarantees. The Appointed Actuary should provide the rationale for the choices made.

B.4.2.4.1 Stochastic Models

For products with financial guarantees using a stochastic approach to measure the market consistent value of the guarantees, the Appointed Actuary should explain the appropriateness of the model being used and how the range of stochastic scenarios adequately reflects the liability cash flows.

Discussion should include, but not be limited to, the description of the interest rate model, equity return model, calibration process, and types of tests performed to ensure that the number of scenarios used were appropriate. Discussion is expected to include, but not be limited to, the following by country and by type of product, as appropriate:

• The modelling of the cash flows;
• Description of the random number generator(s);
• Description of the economic scenario generator(s), including:
  • Description of the interest rate, bond indices and equity return model, calibration process and parameters (for example mean, volatility, mean-reversion level and speed, etc.)
  • Modelling of discount rates;
  • Assessment of the appropriateness of the number of scenarios used to ensure the convergence of the valuation of the actuarial liabilities;
  • The sources of data used;
  • Rationale for choosing to use a specific model;
  • Adjustments made to the model to reflect differences between the embedded options/guarantees and the financial instruments used to derive the market observable inputs;
  • Basis risk modelling; and
  • Any approximations and simplifications made to stochastic modelling.

The Appointed Actuary is expected to discuss the above by various product types as follows:

1. segregated fund contracts;
2. universal life insurance contracts; and
3. other types of contracts with financial guarantees such as Participating products, adjustable products, annuity contracts with minimum interest guarantees, and accumulation contracts with indexation guarantees.

B.4.2.4.2 Non-Stochastic Models

For products with financial guarantees using a non-stochastic approach to measure the market consistent value of the guarantees, the Appointed Actuary should explain how this approach meets the objective of consistency with observable market variables based on the specific facts and circumstances.

If a replicating portfolio is used, the following information should be disclosed:

• The types of products for which a replicating portfolio is used for valuation including the rationale for choosing this approach;
• How the replicating portfolio is constructed – that is, how the entity ensures that the replicating portfolio (IFRS 17 Paragraph B46) has the cash flows that exactly match the cash flows of the contract liability in amount, timing and uncertainty; and
• At a high level, the types of assets that are expected to be included for each replicating portfolio, along with the rationale for decisions made.

For other specific details regarding segregated fund and Par products, refer to Section 5.2 and section 7 respectively.

B.4.2.5 Use of Reinsurance to Mitigate Risks for the Underlying Contracts

Where reinsurance is material for the product type, the Appointed Actuary should provide a description of the reinsurance structure with respect to risks and allowances. The AAR should also disclose any new reinsurance treaty or other arrangement. Disclosure should include the effective and expected termination dates, recapture clause, the type of reinsurance, a description of the products covered, whether there is significant insurance risk transferred, and any significant impact to liabilities for insurance and investment contracts and capital.

B.4.2.6 Expected Experience Assumptions for Non-Financial Risk

The Appointed Actuary must document all expected experience assumptions for non-financial risk used in the valuation, describing their rationale and validation. This includes mortality, morbidity, mortality improvement, morbidity improvement, lapses, directly attributable expenses, inflation, renewal/conversion, disability/recovery, transaction-based taxes, investment income tax and any other contingencies that are applicable. If an assumption is common to several products, the Appointed Actuary can then specify where the relevant assumption is discussed in the AAR.

While OSFI expects all assumptions to be documented, the Appointed Actuary must use judgement in deciding on the amount of detail included in the AAR with respect to assumptions. For instance, multi-page listings of mortality/morbidity tables or lapse tables are discouraged. A high level description of the processes and approaches used to conduct experience studies, such as number of years of data used, frequency of conducting the study, how data are analysed, use of predictive analytics, etc., should be included.

The AAR must disclose how the expected experience assumptions were determined with specific reference to entity experience studies and industry data as applicable. The credibility of the entity data is to be disclosed, as is any blending of entity and industry data.

If industry tables are available, but not used, the Appointed Actuary should provide the rationale for choice made and show broadly how the selected assumptions compare with a relevant industry table. For assumptions where limited experience exists, the Appointed Actuary should disclose the basis and rationale for the assumptions selected.

Any use of implicit assumptions or approximations requires disclosure and discussion.

The Appointed Actuary should disclose when the expected experience assumptions were last updated or reviewed, and briefly describe the policy (ies) and guidelines that govern how frequently each material expected experience assumption is to be updated or reviewed. The AAR should also note if the frequency of updating or review of expected experience assumptions is not governed by any policy or guideline.

A comparison of actual experience versus expected experience assumptions should be shown separately for each material assumption within each product and for the last three years if the data is available. The AAR should document where such studies are done at a more aggregate level than the product level. This comparison should be shown separately for the key risk assumptions. The results for lapse should be shown separately for lapse-supported products and non-lapse supported products.

This analysis does not require a full formal experience study. It could consist of expected experience per the valuation system versus actual experience taken from the accounting data. Consistent differences in one direction and large swings should be explained. If such actual to expected comparisons are done for only a portion of the product lines, the AAR should show the proportion that is measured. The AAR should also disclose if such studies are not available.

B.4.2.7 Construction of Discount Rates for Cash Flows that Vary Based on the Returns on Underlying Items

The Appointed Actuary should discuss how the financial risk is reflected in the valuation per IFRS 17 paragraph B74 (b)(i.e. whether discount rates reflect the effects of financial risk or adjust cash flows for the effect of financial risk or some combination).

Under IFRS 17, it is possible to separate the insurance contract cash flows between those that vary with returns on underlying items and those that do not vary, and to use different discount rates to discount different sets of cash flows.

If a separation of cash flows is used, the Appointed Actuary is required to explain in detail the methodology or methodologies used to determine the corresponding discount curves used for cash flows that vary with returns on underlying items, including the underlying assets, and the relationship between the actual yield rates and discount rates.

If the cash flows being valued are not separated, the Appointed Actuary should explain what valuation approach is used and how the discount curve is developed for discounting the cash flows. The Appointed Actuary should disclose the discount rates used in Table 4.2.7 of the accompanying Supplementary Table Spreadsheet.

B.4.2.8 Method and Assumption Changes

The changes must be described by quarter (if applicable). If the assumptions/methods are changed, the AAR should explicitly document the previous assumptions/methods. This will allow for easier comparisons.

B.4.2.9 CSM Amortization

The Appointed Actuary should disclose the coverage unit chosen for each product type, and the setting of the discount rates if the entity opted to use discounting to determine the coverage units. If there are multiple coverages within a group of contracts, the Appointed Actuary should also describe the approach to combine the coverages in the development of coverage units.

The Appointed Actuary should comment on the non-financial assumption unlocking where there is material impact on the CSM and coverage units. Other events, such as de-recognition of contracts, could materially have an impact on the CSM and coverage units.

B.4.2.10 Internal Control Analysis of Actuarial Liabilities

The Appointed Actuary typically makes use of some method(s) of internal analysis to verify or validate the actuarial and other policy liabilities. This can take a variety of forms. Examples are (i) ratios of face amount to (re-)insurance contracts issued liabilities/assets, (ii) trend analysis, (iii) ratios to fund values, etc. The Appointed Actuary should discuss the internal analysis used to validate the actuarial and other policy liabilities and disclose the numbers from this process in the AAR.

In particular, the Appointed Actuary should describe the type of data provided and the review and verification procedures applied and the procedures and steps undertaken to ensure that the valuation data is sufficient, reliable and accurate. For example, data for liabilities should be reconciled between the source administration systems and the valuation system. Where any information is found to be inconsistent, the Appointed Actuary should explain what actions have been taken to adjust/correct for any errors found.

It is OSFI’s expectation that the Appointed Actuary has established suitable procedures to verify that the data utilized is reliable and sufficient for the valuation of the actuarial and other policy liabilities.

The Appointed Actuary should describe 1) any use of the work of another actuary or others professionals; 2) the scope of such use; 3) the rationale for such use and 4) the extent of the review of the other person’s work.

B.5 Additional Liability Disclosures

B.5.1 Scenario Testing of Discount Rates

The Appointed Actuary is also asked to disclose the effect of using the following discount rates as valuation rates:

• Deduct flat 50* basis points from the discount curve.
• Add flat 50* basis points to the discount curve.
  • * If a stochastic approach is used, each scenario is shifted +/- 50 basis points.
• Use the December 2023^{Footnote 2} CIA Curves from the CIA website section Rates and Indexes that has a link to the Fiera Capital where the CIA curves are posted.  Rates for terms beyond 30 years should be assumed to be equal to the 30-year rate.

The above sensitivity tests should be performed on an enterprise-wide basis for the (re-)insurance contracts issued and reinsurance contracts held (i.e. including Canadian, the U.S. and international business). The future cash flows and other adjustments to reflect the financial risks related to the future cash flows should be determined assuming the interest rate scenarios mentioned above. The present value of future cash flows and the risk adjustments are to be disclosed separately. Locked-in CSM interest rates should not be changed per IFRS 17 paragraph 44b. However, the insurer is required to recalculate CSM to reflect the ripple effect due to the change in the discount rates used to discount the future cash flows and risk adjustment (for example if the lapse assumption changes with interest rate changes).  Insurers should disclose the (re-)insurance contracts issued liabilities/assets and reinsurance contracts held assets/liabilities for both the Canadian, the U.S. and international business for the base run and for each sensitivity scenario in Table 5.1 of the accompanying Supplementary Table Spreadsheet.

Distinct investment and service components embedded in the insurance contracts, as well as liability for remaining coverage using the premium allocation approach are excluded from the sensitivity tests. For Canadian and U.S. business, the (re-)insurance contracts issued liabilities/assets and reinsurance contracts held assets/liabilities should be further disclosed in three categories:

1. “Cash flows that do not vary with returns on underlying items” – this category includes (re-)insurance contracts issued and reinsurance contracts held with cash flows that do not vary with returns on underlying items. If the (re-)insurance contracts issued and reinsurance contracts held have both cash flows that vary and do not vary with returns on underlying items such as universal life insurance contracts, and the entity can segregate the cash flows that do not vary from cash flows that vary with returns on underlying items, then the cash flows that do not vary should be included in this category, and the cash flows that vary should be included in category 2, as described below.

2. “Cash flows that do vary with returns on underlying items” – this category includes (re-)insurance contracts issued and reinsurance contracts held with cash flows that do vary with returns on underlying items.

3. “Other” – this category includes all other (re-)insurance contracts issued liabilities/assets and reinsurance contracts held assets/liabilities not included in category 1 and 2. If the (re-)insurance contracts issued and reinsurance contracts held have both cash flows that vary and do not vary with returns on underlying items such as universal life insurance contracts, and the entity cannot segregate the cash flows that do not vary from cash flows that vary with returns on the underlying items, then the insurance contracts will be included in this category.

Insurers should include all ripple effects (this includes but is not limited to impacts on risk adjustment, cash flows of products that have cash flows that vary with underlying items, etc.) resulting from the shocked scenarios. The tests should be based on data at the fiscal year-end. The above shocks are defined on a spot rate basis; insurers should increase/decrease the discount curve by the magnitude of these shocks on spot rate basis. Each shock should be performed independently.

In addition, insurers should further break down the (re-)insurance contracts issued liabilities/assets and reinsurance contracts held assets/liabilities by present value of future cash flows, risk adjustment, and contractual service margin. If the margin approach is not selected to calculate the risk adjustment, the Appointed Actuary should report the constant risk adjustment in the table.

The sensitivity tests are the same for all jurisdictions and could result in negative interest rates in certain scenarios and countries/regions. In these instances the rates should not be floored at zero.

For assumed inflation rates, investment income tax, participating policyholder dividends, adjustable features, and minimum credited interest rates, the Appointed Actuary should reflect the interest rate scenarios as mentioned above. For example, for a universal life contract that has minimum interest guarantees and a stochastic valuation is used, the market consistent value of the guarantees should be projected as a cash flow at time zero, and should be revalued under the scenarios mentioned above so that the change in the market consistent value of the guarantees in response to movements in interest rates is appropriately captured.

Under each scenario, the Appointed Actuary should discuss the impact on participating policyholder dividends and/or participating surplus resulting from the use of the discount rates.

B.5.2 Segregated Fund Products: Liability and Capital Provision

The Appointed Actuary must disclose the following information, at a minimum, in the format presented below:

• B.5.2.1 - Product features for the material blocks. Include separate descriptions of products for differing guarantee levels and features.

• B.5.2.2 - New products, including guarantee levels and features, issued in the year.

• B.5.2.3 - Measurement Model used to value the insurance contracts liabilities for segregated fund guarantees. If the VFA is used, the assessment of the three criteria for the definition of insurance contracts with direct participation features should be disclosed.

• B.5.2.4 - Methodology employed to determine financial guarantee provisions. If stochastic techniques are not used, the reasons should be disclosed along with any plans to adopt such methods.

• B.5.2.5 - Description of how onerous contracts are determined and the loss component amount by portfolio.

• B.5.2.6 - Description of investment return model, calibration process and resulting parameters.

• B.5.2.7 - Description of valuation fund mapping process.

• B.5.2.8 - Liability assumptions and details about the determination of the probability weighted cash flows and risk adjustments for non-financial risk.

• B.5.2.9 - Description of the policyholder behaviour assumptions including dynamic lapse (if applicable) function and sample rates. Policyholder behaviour assumptions include the base lapse rates, full lapse rates, partial withdrawal rates, fund transfers, future deposits. For living benefit products (for example, GMWB), include utilization rates and payout levels. The most critical aspects of policyholder optionality must be disclosed regardless of product.

  The assumed lapses for a given product would reflect several variables including product type, term to maturity, registration type, surrender charge period and degree to which the contract is in-the-money. The formula should produce relatively low or zero lapses in situations where the contract is deep in-the-money and close to maturity. Conversely, for business well out-of-the-money, the assumed lapses may be high, reflecting the low perceived value of guarantees by the policyholder.

• B.5.2.10 - Sensitivity analysis and rationale for choices of critical assumptions.

• B.5.2.11 - Risk Adjustment included in the financial statements.

• B.5.2.12 - Insurance Contracts Liability and Required Capital for the guarantees.

• B.5.2.13 - Brief discussion on controls to ensure that results are appropriate.

• B.5.2.14 - Impact of an immediate 15% or higher downward shock on the total fund value and the resulting LICAT ratio. In addition, the Appointed Actuary can disclose the results of the most recent FCT, or alternate scenario provided it captures market downturns of at least 15%. Potential action plans should be disclosed as appropriate.

B.5.3 Bulk Provisions

The AAR must disclose the amounts of any bulk provisions, with each disclosed separately for the last two years in Table 5.3 of the accompanying Supplementary Table Spreadsheet. Bulk provisions are expected to be temporary in nature and calculated outside the core valuation platform.

Examples of such provisions that fall into this category include:

1. manual adjustment reserves that are the result of the absence, or the inadequacies, of a valuation system,
2. a bulk reserve to cover potential data problems,
3. liabilities held to cover cyclical fluctuations,
4. a manual adjustment that does not have a natural run-off pattern based on the underlying policies, and
5. manual adjustments used to offset current experience fluctuations, etc.

The above are examples only and should not be considered an exhaustive list.

The disclosure should include the reasons for holding these provisions, the methods and assumptions used to determine the provisions, and policies for releasing these provisions in the future, and the allocation methodology of the bulk provisions to portfolio level. Any changes in these provisions must be disclosed as a methodology/assumption or other change and reported by quarter in Table 2.3b or 2.3c and annually in Table 2.3a.

OSFI expects entities to have approved policies describing the purpose and criteria for building and releasing such provisions. The Appointed Actuary should disclose the purpose and the criteria for determining and releasing the provisions.

B.5.4 Reinsurance Program

The Appointed Actuary must document the entity’s reinsurance program. This includes retention limits, and any changes in such limits in the last three years. The disclosure should also include any entity policies with respect to the maximum exposure allowed to a single reinsurer.

The Appointed Actuary should give a list of all material reinsurance agreements and indicate whether it is internal or third party reinsurance, and whether it is considered registered or unregistered. The Appointed Actuary should detail the type of reinsurance, a description of the products covered, key risks transferred, retention limits, the effective and expected termination dates, experience or profit share arrangements, any cancellation or adjustability clauses, and recapture clause. The Appointed Actuary should also clearly describe stop loss and catastrophe arrangements.

The AAR should also detail the treatment of expense sharing between the reinsurer and the direct writer.

OSFI is concerned about the use of back-to-back reinsurance contracts. Any reinsurance arrangements where an entity cedes a block of business to a reinsurer and then accepts the same, or a similar, block of business back on a different basis requires full disclosure in the AAR. OSFI does not permit entities to take capital credit for these arrangements.

The Appointed Actuary must disclose information about any material financial reinsurance agreements where there is no significant transfer of insurance risk between the ceding entity and the reinsurer, or where there are other reinsurance agreements or side letters that could offset the financial effect of the first reinsurance agreement. If no such agreements exist, the Appointed Actuary must state that there are no material financial reinsurance agreements. The Appointed Actuary should also describe the process or assessment to evaluate the risk transfer used to reach the above conclusion. Entities should not use insurance contract accounting for transactions that are substantially a form of financing or principally involve the transfer of financial risks.

The AAR must list all of the assumption reinsurance agreements entered into or exited from during the last three years. This information, which is expected from both the ceding and the assuming entities, should include the:

• date of the transaction,
• line of business involved,
• size of the liabilities at the time of the transaction and
• name of the entity.

The Appointed Actuary should disclose any reinsurance arrangement which involve multiple reinsurers, specialized large risk transfers that may include statutory approvals, or multiple transitions from reinsurer(s) to reinsurer(s)/retrocessionnaires, how the liabilities were determined, and the impact on capital.

The Appointed Actuary should disclose any related party reinsurance. This includes reinsurance to or from a parent entity, a subsidiary entity or any affiliated entity, whether Canadian or foreign. The disclosure should include the:

• parties involved,
• type of reinsurance deal,
• amount,
• issue date and
• maturity date.

The Appointed Actuary should disclose whether there are any material risks from possible recapture of existing reinsurance agreements.

The Appointed Actuary should discuss any risk mitigation techniques in place, including but not limited to trust accounts, letters of credit, etc. The AAR should include a list of the reinsurance agreements that incorporate trust accounts or letters of credit.

In cases where a reinsurance financing arrangement significantly alters the pattern of liabilities, the Appointed Actuary should discuss the extent to which this arrangement involves a complete transfer of risk to the reinsurer. OSFI may request the Appointed Actuary to calculate and disclose capital requirements as if the particular arrangement had not been in place.

The carrying amounts of reinsurance contracts held assets/liabilities across all lines of business must be aggregated by reinsurer. The resulting ten largest reinsurers, based on the carrying amounts of reinsurance contracts held assets/liabilities, ceded outstanding claims and other amounts owed, must be disclosed in the form of Table 5.4. OSFI expects this disclosure to be done by product type. This top-ten list must be assembled by entity groups, and not by individual subsidiaries of a reinsurance conglomerate.

B.5.5 Liability Roll Forward

The liability roll forward schedules are shown in Table 5.5.a to 5.5.d of the Supplementary Table Spreadsheet, separately for insurance contracts and reinsurance contracts held. The Appointed Actuary is requested to provide the liability roll forward schedules by participating and non-participating, and by portfolio for Canada and the U.S. For other regions (i.e., the U.K., Europe, Japan, and Other), please provide the liability roll forward schedule by participating or non-participating for each region. These tables are constructed to enable users to reconcile information within the AAR to the Annual Returns, as per the following:

For (re-)insurance contracts issued excluding Segregated Fund Guarantee:

• Page 20.012 – Liability Roll Forward (Analysis by measurement component ((Re-)Insurance contracts issued not measured under the PAA - excluding Segregated Funds));

For Reinsurance contracts held excluding Segregated Fund Guarantee:

• Page 20.016 – Liability Roll Forward (Reinsurance contracts held analysis by measurement component (Contracts not measured under the PAA - excluding Segregated Funds));

For Segregated Fund Guarantee:

• Page 20.013 – Segregated Funds - Liability Roll Forward (Analysis by measurement component ((Re-) Insurance contracts issued not measured under the PAA))
• Page 20.017 – Segregated Funds - Liability Roll Forward (Reinsurance contracts held analysis by measurement component (Contracts not measured under the PAA))

OSFI will consider aggregation of portfolios where appropriate. The Appointed Actuary should contact AARinquirylife@osfi-bsif.gc.ca for further discussion of the specific circumstances.

B.5.6 Fraternal Funds

The Appointed Actuary for a fraternal benefit society must disclose any surplus or deficit in the fraternal funds of the entity.

The Appointed Actuary should disclose any special fees, subsidies from the fraternal organization and any special income.

B.5.7 Currency Exchange Rates

If applicable, the Appointed Actuary should show the material currency exchange rates used in the financial statements for the last two years in Table 5.7 of the Supplementary Table Spreadsheet.

B.6 Asset Liability Management (ALM)

In order to better understand the risks associated with mismatches between asset and liability cash flows, OSFI is continuing to request ALM information through the Memorandum to the Appointed Actuary Report. The Appointed Actuary Report should describe the (re-)investment strategies, ALM philosophy, objectives, policies and practices of the entity as detailed below.

This section of the AAR should document the asset segment details of the entity’s ALM. In the reporting for each interest sensitive asset segment, the AAR must include an overview of the asset liability risk management practice for that segment. The Appointed Actuary should describe what product types are included in each asset segment for the ALM purposes. This should include, but is not limited to:

• The ALM strategy employed for each segment such as cash flow matching, average Macaulay or modified duration matching, key rate duration matching, convexity matching, value at risk or CTE measures, etc. Please provide detail on the asset mix, types of asset used, credit rating, etc.
• The specific operating guidelines such as asset mix guidelines, mismatch tolerance limit, concentration limits, currency mix, etc.
• The processes in place, by asset segment, to manage interest rate risk.
• Key metrics or sensitivity testing used to measure asset liability mismatch position, and the frequency of measurement and reporting for monitoring purposes.
• Governance structure for managing asset liability mismatching risk.
• The reinvestment strategies applied.
• The term for fixed income assets which are used to immunize/match liabilities and the use of non-fixed income assets to support liability cash flows after this term.
• Reasons to employ non-fixed income assets in the investment strategies.
• Any major changes during the year in the ALM and Investment strategies and guidelines should be disclosed.
• Details on hedging strategies used to manage the ALM risks.

The Appointed Actuary should provide the details of the asset and liability mismatch position as of the current year-end.

The composition of each asset segment must be documented separately in the Table 6.1 of the accompanying supplementary spreadsheet. The methodology for the determination of the liability cash flows used for ALM purposes for each asset segment should be documented in this section of the AAR.

Similarly, some of the descriptions of methodology or some assumptions may be the same for more than one asset segment. This only needs to be disclosed once in the AAR at an appropriate summary level, with a direct reference, where applicable. An example of this would be where the Asset/Liability management (ALM) is the same.

The Appointed Actuary should disclose the policy for determining the type of assets used to back the liabilities in this asset segment.

The Statement asset values (excluding the surplus segments if they are separated from the liability segments) should be the same as are used in the Annual Return.

Any inter-segment notes should be shown as positive and negative amounts in Table 6.1.

If there are any “other assets”, “other liabilities”, or “other investments” which are material to that asset segment, the Appointed Actuary is expected to provide more detail.

If the asset mix, such as bond quality, has changed materially between years, the reason should be discussed.

If the investment policy, strategy, or ALM approach, practice and process has changed during the year, including any changes related to IFRS 17 requirements and/or implementation, this should be discussed.

The use of assets other than bonds, mortgages, equities, real estate, policy loans and cash to back (re-)insurance contract issued liabilities/assets must be disclosed. Such assets include, but are not limited to, inter-segment notes, derivatives, goodwill, loans to subsidiaries or parents, etc.

As required by the ICA subsection 611(1), only vested assets may be used by foreign companies to determine their (re-)insurance contract issued liabilities/assets.

Briefly describe the use of intersegment notes as a part of the entity’s investment policy framework and the controls associated with their use.

The Appointed Actuary should disclose the current year yield rates for fixed income assets and the actual/expected returns for non-fixed income assets (where applicable) by asset segment in Table 6.2 of the accompanying Supplementary Table Spreadsheet. The non-fixed income actual/expected returns should include dividend/income return and capital gain separately (if possible), used for ALM purposes. If not possible to separate them, the total actual/expected returns should be provided. The actual/expected returns are the returns earned over the past 12 months. For rows where actual/expected returns are noted, please provide the actual return if available. If this is not readily available, list the expected annual return rate. If a surplus segment is separate from the liability segment, it is not required to provide the  asset information for the stand-alone surplus segment in Table 6.2.

B.7. Report on Participating Policies

B.7.1 Participating Account and Sub-Account Disclosure

While entities typically disclose only one participating account, in some cases an entity may have multiple participating sub-accounts. A sub-account may arise for the following reasons:

1. Sub-accounts required by a demutualization. The closed fund, open fund and ancillary fund are such sub-accounts;
2. Sub-accounts required as part of a past agreement to take over / acquire / merge a block of business from another entity; and
3. Sub-accounts that the entity is internally tracking in its accounting and/or experience for use in setting dividends.

The Appointed Actuary should provide a brief description of the nature of the business in each sub-account.

The Appointed Actuary must provide details on the measurement approach for the participating insurance contracts, regarding the determination of the policyholders’ liabilities and policyholders’ equity, as at the transition date.

B.7.1.1 Participating Account, Policyholders’ Equity and Transfers to Shareholders Account

The AAR must disclose the details for the total participating account and for each sub-account that may exist in Table 7.1.1 of the accompanying Supplementary Table Spreadsheet.

B.7.1.2 Allocation of Investment Income, Expenses and Taxes

The Appointed Actuary should disclose the method(s) used to allocate investment income, expenses and taxes to each of the sub-account(s).

The Appointed Actuary should also disclose if there is any commingling of assets between different participating sub-accounts or between participating and non-participating accounts.

When disclosing expense allocation method(s), the Appointed Actuary should describe how expenses are charged to each participating sub-account(s). The Appointed Actuary should also disclose the type of expenses (for example maintenance expense, acquisition expense, etc.) that are allocated to the participating sub-account(s). Where expenses are fixed or guaranteed, the AAR should provide details of such arrangements, and discuss whether the full fixed or guaranteed expenses are included in the valuation.

B.7.1.3 Participating Policyholder Dividend Policy, Participating Account Management Policy and Dividend Scale Changes

The Appointed Actuary is expected to include in the AAR the Dividend Policy and Participating Account Management Policy that are publicly disclosed to participating policyholders. The Appointed Actuary is to disclose where this public disclosure is made. If there are any changes to the Dividend Policy and Participating Account Management Policy, the Appointed Actuary should explain all the changes and provide supporting rationale.

The Appointed Actuary must disclose if there are any changes to the current dividend scales from the previous year’s, and the key drivers of these changes, including any changes to the dividend determination practices (for example experience factor classes). A comparison of actual experience (for example interest, mortality, expense, etc.) in the past year to current expected experience assumptions and to the current dividend assumptions should be tabulated in Table 7.1.3a of the accompanying Supplementary Table Spreadsheet. The dividend interest rate, actual portfolio yields for assets supporting the participating account, and yields on surplus should be tabulated in Table 7.1.3b. The yields for assets supporting the participating accounts and participating account surplus should be expressed as market yields without smoothing. Dividend scale changes should be tabulated in Table 7.1.3c of the accompanying Supplementary Table Spreadsheet. The level of the disclosure of the dividend scale change should be in line with the entity’s dividend determination practices.

B.7.1.4 Dividend Determination Methodology

The Appointed Actuary should disclose the dividends determination methodology, which includes but is not limited to:

• the principles of dividend class determination;
• a description of each of the experience factors used in the calculation of dividends;
• whether earnings on surplus are distributed to policyholders through dividends and the proportion of any earnings on surplus that are included in the calculation of dividends; and
• description of all adjustments that are made to the experience factors or to the dividends.

In addition, the AAR should disclose the entity’s definition of Policyholder Reasonable Expectations (PRE), and how the PRE is considered in setting dividends. The AAR should also include a description of how the contribution principle has been followed, and, if it has not been followed, a description of the deviations and the rationale for the deviations.

B.7.2 Participating Closed Blocks

This section of the Memorandum applies only to former Canadian mutual companies that have demutualized.

B.7.2.1 Reporting

When an entity has established participating closed blocks per the OSFI document entitled “Par Account Restructuring in Canadian Company Demutualizations”, the Appointed Actuary must provide an annual report listing the following:

1. A financial analysis of the experience in each of the participating accounts over the past twelve months;
2. The current and projected excess or deficit positions (i.e. the amount by which the value of the assets backing the policies in a closed block exceeds the amount of the insurance contracts issued liabilities/assets as determined under accepted actuarial practice, based on the current dividend scale approved by the Board) in the closed par blocks;
3. A projection of the gain/loss position of the closed par block;
4. The identification of accumulated gains or losses in dividend stabilization reserves (DSR) (if applicable);
5. The dividend recommendation (or most recent dividend recommendation);
6. A description of other factors influencing the dividend recommendation, (for example competitors’ actions);
7. Closed par block risk adjustment for non-financial risk which is included in the Ancillary Account. Provide information on the methodology used to determine the risk adjustment for non-financial risk. If any changes occur in the valuation basis for the risk adjustment for non-financial risk, a rationale for those changes should be included; and
8. Any other changes in the Closed or Ancillary sub-account, the Appointed Actuary should explain each change, including the rationale for the change. Corresponding information should be tabulated in Table 7.6.

B.7.2.2 Ongoing Opinions

The Appointed Actuary is required to provide opinions on an annual basis in response to the following questions:

• Are the participating accounts being maintained in accordance with any commitments made at the time of demutualization, including the Conversion Proposal, the Operating Rules and any related reports?
• Are the assets in the Closed Block sufficient to provide for the contractual benefits, plus policyholder reasonable expectations of non-guaranteed elements? Are dividends being managed in a way that neither a material surplus (tontine) nor deficit situation develops?
• Is the dividend recommendation in compliance with the dividend policy (or policies) of the entity?
• Are allocations of investment income, expenses, etc. between the account fair and equitable? Are the allocations being determined on the basis outlined in the Operating Rules?
• Is the asset mix consistent with the prior period and with the Closed Block investment policy?

B.7.2.3 AAR Reporting

OSFI recognizes that all of the data required to be reported in section B.7.2.1 above may be difficult to obtain within the deadlines required for reporting the AAR. However, the AAR must include, at a minimum, the reporting disclosure items (1), (6) and (10) in table 7.1.1 as well as item (a) and (d) in Section B.7.2.1.

In addition, the Appointed Actuary must provide the reconciliation of DSR balance for the current year in Table 7.2.3 of the accompanying Supplementary Table Spreadsheet. The AAR should include the limits or thresholds that are set to restrict the magnitude of the DSR and explain the key drivers of the current year DSR change.

The other reporting disclosure items and the ongoing opinions must be filed with OSFI no later than six months after the end of the fiscal year.

B.7.3 Participating Blocks Excluding Demutualization Closed Blocks

This section of the Memorandum applies to participating blocks open to new business, not accepting new business, and due to acquisitions.

B.7.3.1 Smoothing of Dividends

The AAR must disclose if any smoothing mechanism is used in the dividend determination.

If a DSR (or other equivalent terms used by the entity) has been established as part of smoothing dividends, the Appointed Actuary should describe the methodology and explain how the Appointed Actuary can ensure DSR is run off in a reasonable time frame.

B.7.3.2 Surplus Management

For each participating block, the Appointed Actuary should disclose the methods used to manage participating account surplus, including, but not limited to the following:

• Whether the contribution to surplus is permanent, temporary or other; the rationale for using the chosen approach along with the definition of the approach.
• For each chosen approach how the distributable surplus is determined.

B.7.3.3 AAR Reporting

The Appointed Actuary must disclose the following for each participating blocks:

• A financial analysis of the experience in each of the participating accounts over the past twelve months
• Any material changes in practice with respect to managing risks within the block;
• If a DSR (or other equivalent terms used by the entity) has been established:
  • the Appointed Actuary must provide a reconciliation of the DSR balance for the current year in Table 7.3.3 of the accompanying Supplementary Table Spreadsheet.
  • the Appointed Actuary must disclose any limits or thresholds that are set to restrict the magnitude of the DSR and should explain the key drivers of the current year DSR change.
• How CSM is determined at transition or on initial recognition of a group of insurance contracts and describe the movement of CSM in the current year, such as what components are specific for participating business (For example, IFRS17.B113(b)).

B.7.4 IFRS 17 Implementation and Impact on the Participating Blocks of Business

Please provide details on the methodologies and assumptions used to determine the provisions for financial risk including guarantees such as minimum zero dividend if the dividend room is depleted based on adverse experience. The liabilities by measurement component should be tabulated in Table 7.4, 7.5 and 7.6 of the accompanying Supplementary Table Spreadsheet. The disclosure in the tables should be at the level which information is available. In cases where the entity is not able to break out the liabilities into the components required in Table 7.6, the entity is permitted to report the information in aggregate.

B.8 Other Disclosure Requirements

B.8.1 New Appointment

OSFI expects Appointed Actuaries to comply with the qualification requirements contained in OSFI Guideline E-15 Appointed Actuary: Legal Requirements, Qualifications and Peer Review. The AAR must explicitly disclose any deviations from these qualifications, including future steps being/to be taken to meet the qualification requirements.

If the Appointed Actuary was appointed to the role during the last year, the AAR must include the following disclosures:

• the date of appointment;
• the date of resignation of the previous Appointed Actuary;
• the date on which OSFI was notified of the appointment;
• confirmation of communication with the previous Appointed Actuary, as required by ICA subsection 364(1); and
• a list of the Appointed Actuary’s qualifications, keeping in mind, but not limited to, the CIA’s Rules of Professional Conduct.

B.8.2 Annual Required Reporting to the Board or Audit Committee

For a Canadian entity, the AAR must disclose the date on which the Appointed Actuary met with the board or the audit committee of the board as required by paragraph 203(3)(f) of the ICA.

For a foreign entity, the AAR must disclose the date on which the Appointed Actuary met with the chief agent, as required by section 630 of the ICA.

For participating account management, the Appointed Actuary must disclose the following in the AAR:

• The written opinion of the Appointed Actuary on the allocations of investment income, capital gains and expenses and whether they are fair and equitable, as required by sections 457 and 458 of the ICA;
• Date on which the Appointed Actuary reported on this to the directors, as required by section 460 of the ICA;
• The opinion of the Appointed Actuary that any transfers from the participating accounts to the shareholders does not materially affect the entity’s ability to continue to comply with its dividend or bonus policy or to maintain the levels or rates of dividends or bonuses paid to the entity’s participating policyholders, as required by paragraph 461(c) of the ICA;

• The report of the Appointed Actuary to the board opining on the fairness to participating policyholders of the proposed dividends and whether the dividends declared are in accordance with the entity’s dividend policy, as required by subsection 464(2) of the ICA;

• The report of the Appointed Actuary to the board opining on the continuing fairness to participating policyholders of the policies for determining dividends of participating accounts during the financial year, as required by subsection 165(3.1) of the ICA; and

• The report of the Appointed Actuary to the board opining on the fairness to participating policyholders of policies on the management of each of the participating accounts, as required by subsection 165(3.2) of the ICA.

Additionally, the Appointed Actuary should describe the due diligence and evidence (for example, description of analysis) to support the above opinions.

B.8.3 Continuing Professional Development Requirements

The Appointed Actuary must disclose in the AAR that he/she is in compliance with the Continuing Professional Development requirements of the CIA.

B.8.4 Disclosure of Compensation

The Appointed Actuary must disclose their compensation. This disclosure is consistent with the Financial Stability Board’s Principles for Sound Compensation Practices, which have been adopted by OSFI. The form of the disclosure statement should be as follows:

If the Appointed Actuary is an employee of the insurance entity, the methodology should include a list of the major components of the Appointed Actuary's compensation. This could include base salary, cash and/or stock-based bonuses, retirement and other significant benefits, other compensation (for example, signing bonuses, severance packages), and perquisites (for example, car allowances).

For each component of the Appointed Actuary's compensation listed above that varies with the performance of the entity, the value of that component as a target percentage of the base salary, must be disclosed. This might include, but is not limited to, participation in a bonus plan and/or a stock option plan that is based on entity performance. The entity must disclose the basis used to determine the amounts of these variable compensation components.

If the Appointed Actuary serves as an external consultant to the entity, then the information provided to OSFI must include:

• The consulting fees payable for the preparation of the AAR, FCT, and any other work performed as the Appointed Actuary in respect of the entity’s current fiscal year;
• The basis used to determine the consulting fees payable for the Appointed Actuary’s work (for example, fixed fee basis, time and expense basis, as well as any caps, etc.), and whether the fees include any element of incentive or results-based compensation;
• The proportion that the consulting fees payable for the Appointed Actuary’s work for the entity represents, as a percentage of the total revenue billed by the consulting firm’s Canadian legal entity to the entity in the consulting firm’s prior fiscal year (
• The proportion that the consulting fees payable for the Appointed Actuary’s work for the entity represents, as a percentage of the total revenue billed by the consulting firm’s Canadian legal entity to all clients in the consulting firm’s prior fiscal year (

B.8.5 Reporting Relationships of the Appointed Actuary

The AAR should disclose the reporting relationships and dependencies of the Appointed Actuary.

For Appointed Actuaries who are employees of the entity, the AAR should disclose the name and position of the person (or persons) to whom the Appointed Actuary reports as well as any changes in this regard over the past year. Both solid line and dotted line reporting relationships should be disclosed, as well as any anticipated change.

When the Appointed Actuary is not an employee of the entity, the AAR should disclose the names and positions of the main contacts within the entity with respect to the different functions of the Appointed Actuary, such as the valuation, FCT, and LICAT.

For example, the AAR should disclose the name and position of:

• the person who has hired the Appointed Actuary; and
• the entity employees with whom the Appointed Actuary discusses findings and reports.

B.8.6 Peer Review of the Work of the Appointed Actuary

OSFI requires the work of the Appointed Actuary to be externally peer reviewed, as set out in OSFI's Guideline E-15 Appointed Actuary: Legal Requirements, Qualifications and Peer Review. The guideline, which includes peer review requirements, was updated in 2012.

For each Peer Review Report filed in the last three years, the Appointed Actuary must complete Table 8.6a of the accompanying Supplementary Table Spreadsheet.

For each peer review report, the Appointed Actuary should summarize the key findings or recommendations, and the status of each finding / recommendation by year in the following table. For the recommendations from peer reviews before the effective date of IFRS 17, the Appointed Actuary should indicate whether the recommendations are still applicable under IFRS 17.

The Appointed Actuary should disclose if no peer reviews were completed in the last three years and the reasons why. Note that such circumstances would be rare and require OSFI pre-approval.

B.8.7 Transition to IFRS 17

The following disclosure is required only for the year of transition. This section will not be required in the next AAR.

B.8.7.1 Classification of Contracts

The Appointed Actuary should disclose any contract classification that have changed under IFRS 17 from IFRS 4 (for example. from IFRS 4 investment contract to IFRS 17 insurance contract or vice versa), the size of liabilities and the rationale for the reclassification in the following table:

B.8.7.2 Transition Amounts

For contracts measured under the modified retrospective approach or the fair value approach on transition to IFRS 17, the Appointed Actuary should provide details on how the entity determined the measurement of the contracts at the date of transition and how CSM was determined.

B.8.7.3 Risk Adjustment If Margin Approach Is Used

For each non-financial risk, the Appointed Actuary must disclose and explain the level of margin used. The Appointed Actuary must highlight if a margin is outside the range recommended in the CIA Standards of Practice that existed prior to IFRS 17.

Appendix I – Opinion of the Appointed Actuary

The AAR must include a copy of the following opinion. The electronic filing of the AAR with OSFI must include a scanned copy of the signed opinion.

The language in square brackets is variable and other language may be adjusted to conform to interim financial statements and to the terminology and presentation in the financial statements.