The Role of the Professional Advisor – The View from Canada

1. The Role of the Professional Advisor – The View from Canada Dave Pelletier Rotorua, 2002.11.14

2. An opening perspective • Post-Enron, a widely-shared perspective that “principles-based” rather than “rules-based” approaches preferable

3. An opening perspective • Post-Enron, a widely-shared perspective that “principles-based” rather than “rules-based” approaches preferable BUT • Principles-based approaches work only with people who have principles!

4. How do we in Canada support the actuary in his professional role? • Standard-setting • The role of the Appointed Actuary • Discipline • Peer review

5. Setting standards – the insurer example • Based on first principles, not arbitrary formulas • For all insurance products, PV of benefits and expenses less PV of premiums, reflecting all elements • Current, meaningful, updated assumptions and terms for ALL business, both new and in-force • Results in a largely meaningful, realistic balance sheet, understandable and usable by policyholders, stockholders, analysts, and regulators

6. The vital role of the Appointed Actuary • Opinion on solvency, not merely on technical calculations • Formal reliance by the auditor and the actuary on each other’s work • Standards promulgated by the CIA on setting “best-estimate” assumptions and PfADs (Provisions for Adverse Deviation)

7. The vital role of the Appointed Actuary –checks and balances • Very detailed annual report to the regulator • the assumptions and methods utilized, including justification, changes, and any deviation from CIA standards • key risks • asset-liability management • Mandatory external peer review • Whistle-blowing responsibility of the AA

8. Discipline • Rules of Conduct (including “Rule 13”), at www.actuaries.ca/publications/2001/20163e.pdf • A well-defined disciplinary process, at www.actuaries.ca/publications/2001/20120e.pdf • Publicity

9. Complaint or inquiry Decision on investigation Investigation Decision to drop or charge If charge, one of: private admonishment fast track disciplinary tribunal (and possibly appeal tribunal) Public notice in latter two cases The process

10. Annual discipline bulletin • Statistics • Educational illustrative cases (confidentiality preserved where private admonishment or no charge) • Reasonably detailed summary (up to 6 pages), with names, where found guilty

11. Statistics 1992 to 2002 • Inquiry/complaint but no IT: 37 (2 currently) • IT but no charges: 23 (5 currently) • Private admonishments: 1 • Fast track: 6 • Disciplinary tribunals: 11 (2 currently) • A flurry early on, but fewer cases recently

12. Guilty (10): Fines and/or costs from $5,000 to $150,000 Suspensions from 1 month to 3 years Prohibition to practice in particular area One expulsion Not guilty 1 totally Some others on some of the charges Appeals 1 verdict / penalty unchanged 1 penalty reduced Results of disciplinary tribunals

13. Peer review • A controversial item – under development since 1995! • Originally suggested by OSFI • Importance due to: • long-term nature of our work • sensitivity to our assumptions (both insurance and pension) • protection of the ultimate (trusting) customer • “oversight” boards now being placed over the accountants

14. Peer review objectives • Continuous improvement in quality of work • Strengthened public confidence • Education of both practitioner and peer reviewer • Reduced risk of error • Feedback to the CIA, to assist in: • development of standards of practice • determination of acceptable ranges of practice

15. Purpose and scope Procedures for supervision of what not personally performed Assumptions and methods Quality of the wording Clarity of communication Completeness Reasonableness of results Procedures to verify data integrity Procedures to ensure calculation accuracy Materiality Peer reviewer to consider:

16. Other aspects of peer review • Peer reviewer to be seen, by the user, as competent and objective • Where complex annual work, can spread over three years • Idea not to reproduce calculations, but rather to review controls, procedures, conclusions • Written opinion that the work performed in accordance with acceptable actuarial practice • Not compulsory. Outlines what required where requested by a user of an actuary’s work. Concerns by some pension actuaries

17. Peer review requirement by OSFI • Peer review required for Appointed Actuary work on liability and solvency margin calculations, participating policy calculations, and DCAT • Pre- or post-release of report itself • Three-year cycle acceptable • Definitions of “competent” and “objective”; eg: • same requirements as to be an Appointed Actuary • cannot be in same company or same consulting firm

18. And so ... • Not a “trust me” philosophy • But instead • a meaningful financial reporting basis • a heavy reliance on the good sense, judgement, training, and experience of the actuary • supported by a rigorous, detailed set of professional standards • supplemented by a system of checks and balances put in place by the regulator and the profession