Office of the Superintendent Bureau du surintendantof Financial Institutions Canada des institutions financières Canada

Discounting

The Appointed Actuary Seminar

Presenter: Patricia Hladun

September 20, 2004

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Topics

• The Move to Discounting

• Annual Return Results

• Unpaid Claims and Loss Ratio Analysis Exhibit

• Sample Review – 10 Companies

• Some Filing Guidelines

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The Move to Discounting

Discounting for P&C companies policy liabilities came into effect Jan 1, 2003

Historical reasons for not allowing discounting:• Short tailed business• Low interest rates• No actuarial requirements (e.g. actuarial report)• Lack of standards of practice• Implicit margin

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The Move to Discounting

Changes in historical conditions:• Increased litigation• Coverage provided becomes longer tailed

and therefore investment income becomes material

• Introduction of actuarial requirements by regulators

• Development of actuarial standards

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The Move to Discounting

Reasons for OSFI requiring discounting:• Consistent with OSFI’s reliance approach• Provides a more realistic measure of financial

performance• Provides for the explicit determination of margins

for adverse deviation• Makes financial reporting practices more consistent

with the economic realities• Improves the consistency of Canadian P&C

financial reporting

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The Move to Discounting

Changes to Actuarial Reports:• Opinions are not qualified anymore• New CIA educational note was developed

(regarding the runoff of unpaid claims on a discounted basis)

• Appendix II was removed and the Unpaid Claims and Loss Ratio Analysis Exhibit was added

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The Move to Discounting

Changes to the Annual Return:

• Policy liabilities are on a discounted basis

• Page 60.41(run-off on a discounted basis) was added

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Annual Return Results

Expected Results based on 12/2001:– Net claims liabilities reduced by $350

million:

• 1 ½ % of net undiscounted reserves

• 8 – 10 points on MCT/BAAT

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Annual Return Results

Use of prior period adjustment at 12/2002:– Canadian (20.40.04.02) 67 million– Foreign (20.45.04.02) 120 million

187 million

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Annual Return Results

Discounting results at 12/2002:– Net outstanding ¾ of 1%– Capital 1%– MCT/BAAT:

• Canadian 1%• Foreign 9%• Total 3%

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Annual Return Results

Discounting results at 12/2003:– Net outstanding 0.8%– Capital 1.1%– MCT/BAAT:

• Canadian 2%• Foreign 10%• Total 4%

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Annual Return Results

Use of Exhibits 60.40 & 60.41:– 60.40 Net Undiscounted O/S Claims 24,925 m– 60.41 Net Discounted O/S Claims 24,714 m– Change

211 m

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Annual Return Results2001 &

prior2002 &

prior2003 &

prior2001 &

prior2002 &

prior2003 &

prior12/01 O/S 19,649 12/01 O/S 16,008

2002 Paid 6,249 2002 Paid 5,04912/02 O/S 14,385 21,938 12/02 O/S 11,870 21,716

Inv. Inc. 87Dev. $ (984) Dev. $ (824)Dev. % -5.0% Dev. % -5.1%

2003 Paid 3,653 6,558 2003 Paid 3,020 6,55412/03 O/S 11,469 16,249 24,925 12/03 O/S 9,611 16,110 24,714

Inv. Inc. 498 1,046Dev.$ (1,721) (870) Dev.$ (1,087) 98Dev. % -8.8% -4.0% Dev. % -6.8% 0.5%

UNDISCOUNTED DISCOUNTED

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Unpaid Claims & Loss Ratio Analysis Exhibit

• Hard copy was included in the AAR

• Electronic copy was to be filed by June 1, 2004

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Unpaid Claims & Loss Ratio Analysis Exhibit

Problems:

• Companies unaware of June 1 deadline

• Software problems

• Incorrect data formats

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Unpaid Claims & Loss Ratio Analysis Exhibit

Results:

• Co-ordination between Quebec regulator and OSFI

• Industry results will most likely be shared

• Target release for early December

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Unpaid Claims & Loss Ratio Analysis Exhibit

Next year:

• For 2004, electronic exhibits are due with the Annual Return filing on March 1 or April 15

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Sample Review – 10 Companies

• 10 of the largest federally regulated companies (8 Canadian and 2 Foreign)

• Primary insurers

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Sample Review – 10 Companies

$ millions

Total undiscounted unpaid claims 10,287

Present value of unpaid claims 9,123

Change 1,164

Percentage Change (11.3%)

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Sample Review – 10 Companies

Discount as % of Undiscounted

Auto BI 11.5%

Auto PD 3.7%

Auto AB 11.3%

Auto Physical Damage 1.9%

Property – Personal 4.6%

Property – Commercial 3.5%

Liability 14.4%

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Sample Review – 10 Companies

Range of change in present values to total undiscounted:

• Low: 6.9%

• High: 13.4%Differences were mainly due to:

• Mix of business

• Auto AB

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Sample Review – 10 Companies

PfAD – Claims• $949 million

• 83% of PfAD

• Average MfAD is 10.4%

• MfAD range is 6.5% to 12.8%

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Sample Review – 10 Companies

PfAD – Claims• Auto BI

– MfAD range: 8.4% to 13.8%– Average MfAD: 11.1%

• Auto PD– MfAD range: 2.5% to 7.4%– Average MfAD: 4.7%

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Sample Review – 10 Companies

PfAD – Claims• Auto AB

– MfAD range: 0.4% to 13.7%– Average MfAD: 9.3%

• Auto AB (excluding one company)– MfAD range: 6.1% to 13.7%– Average MfAD: 10.4%

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Sample Review – 10 Companies

PfAD – Claims• Auto Physical Damage

– MfAD range: 2.5% to 7.4%– Average MfAD: 4.5%

• Personal Property (excl one company)– MfAD range: 2.5% to 9.4%– Average MfAD: 5.2%

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Sample Review – 10 Companies

PfAD – Claims• Commercial Property

– MfAD range: 2.6% to 9.6%– Average MfAD: 6.5%

• Liability– MfAD range: 7.4% to 14.3%– Average MfAD: 11.8%

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Sample Review – 10 Companies

PfAD – Reinsurance• $21 million

• 2% of PfAD

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Sample Review – 10 Companies

PfAD – Interest Rate• $172 million

• 15% of PfAD

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Sample Review – 10 Companies

$ millionsTotal undiscounted unpaid claims 10,287Total discounted unpaid claims + PfADs 10,265Change – Sample of 10 companies 0.2%Change – Industry Total 0.8%

Actuarial reserves as % of undiscounted 99.8%Range 98.1% to 101.3%

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Some Filing GuidelinesReport Copies Send to By DateAA Report 2 copies Ottawa Mar 1/Apr 15DCAT 2 copies Ottawa By Dec 31External Review 2 copies Ottawa ~3 monthsEarthquake 1 copy Toronto Apr 15Electronic Filing 1 diskette Ottawa Mar 1/Apr 15